One of the goals I wanted to achieve before I declared financial independence was to pay-off the mortgage on our home. We live in a family-oriented community with good public schools and we felt like we wanted to stay in this home until after the kids went to college. I felt like I could sleep easier at night after stepping away from my corporate job if the home we lived in did not have any debt attached to it. I accomplished this goal in 2019 and today my house is paid-off in full. We have no mortgage payment and that saves us about $2,000 per month in expenses, or $24,000 per year.
It was a personal decision to pay-off the mortgage and I understand the reasons why our choice is not the savviest of financial decisions according to most financial experts. We had a 15 year mortgage with a 3.0% interest rate and by paying it down early we eliminated a very low-interest rate payment that until recently had some tax benefits to it. We probably could have put that same money we used to pay-down the mortgage into an investment that had a financial return much greater than 3% but we would still have a mortgage with all the interest that goes along with it. I will write some posts later on investing v. paying-off your mortgage and also on owning v. renting a home but this post is on how much a home can still cost you even after you pay-off your mortgage. The point here is to be mindful of these other housing costs when making your decision on the home you buy (or rent although the numbers will be somewhat different).
Here is how much my home cost in 2019 even after paying-off the mortgage in full:
Maintenance (Water leak and re-piping)
Electricity, Water, Gas
So, in 2019 my housing costs were just under $29,000 even though I paid-off my mortgage. That means paying-off our home only reduced our total housing costs by about 50%. You might look at our costs from last year and think that some of these costs (e.g. that gardener and cleaning) are too much and hopefully you will not have such high maintenance fees but there are maintenance costs associated with living in a home and at a minimum you will have to replace things over time as they break.
Choose Your Home Wisely
Why am I telling you about my housing costs?
I want you to be smart about the home you buy or rent and realize that the other costs besides the mortgage or rent can also be a significant part of your total housing costs and can vary based on the home that you live in. I have talked about living in a home that meets but does not exceed your needs and I’ve tried to follow this approach during my life. Even when my wife and I bought our current home (which is the home we want to finish raising our kids and live in for the next 10 years at least), we looked at three types of homes in the same community:
- Home 1 – Smaller home, super small yard
- Home 2 – Mid-sized home, above-average sized yard (we purchased this home)
- Home 3 – Larger home, above-average sized yard
The larger home was beautiful, with all the bells and whistles, but it had more rooms and space than we needed and we did not see our family ever growing to the point that we would need all of the extra space. We also did not see the need to live in a home with so many high-end finishes because we are a very active family that tends to wear out things like hardwood floors.
We could have made the smaller home work but the kids would have shared a room and we felt the home would become pretty cramped as the kids grew. However, if the home we were buying was not expected to be our final home with the kids I probably would have picked this smaller home.
The mid-sized home felt comfortable for the family without having unused space and the above-average sized yard (very uncommon for this type of home in the community) will be a big selling advantage when the time comes to sell the home. This is the home we picked and so far it feels like the right decision. My kids use the yard on a daily basis and last year they moved into their own bedrooms.
Assuming we were able to pay-off the mortgage on each of these homes (in reality we would not have been able to pay-off a mortgage on the larger home without at least several more years of me working), here are the varying housing costs even without a mortgage:
Maintenance and Repairs
Electricity, Gas, Water
So, I could have saved an extra $6,000 per year with the smaller home but I pay about $11,000 less per year than if we had purchased the larger home. We know some people in the neighborhood who live in the larger homes and who make less than I did while I was working but they still go to work every day and bust their tails while I have the ability to start things like Fire Mountain!
Your home is a place to live in and not a great investment
A home can appreciate over time but it will not generate passive income and it will actually consume cash while you live in it. Your home should be a place to live in that also acts as a forced savings mechanism with the possibility of seeing appreciation over time. Some people like Robert Kiyosaki, the author of Rich Dad Poor Dad, considers a home a liability because it does not generate income and it costs you money every year like I have outlined in this post. I am not going to call your home a liability but if you place too much of your money into your housing costs it can definitely impede your ability to achieve and maintain your financial independence.
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