The True Cost of Homeownership is Shocking. Shouldn’t Seniors Reap the Benefit?

Do you know how much the typical homeowner has sunk into their home? What is the total cost of homeownership for the older homeowners you meet with? Mortgage professionals like yourself are rightly concerned with the home’s value, outstanding liens or mortgages, and the available equity. That’s all fine but what’s the total investment a typical homeowner has made over 30 years? The numbers may shock you and open up a different conversation with potential reverse mortgage borrowers.

The numbers I will show you today may be shocking for some. The purpose of today’s exercise is not for a potential reverse mortgage borrower to recoup what they’ve put into their home but to understand that they can create monthly cash flow but leveraging what is likely their largest asset and investment. Let’s get started. 

One Example

For example, a couple purchased a home for $175,000 in 1993 at the age of 41. They financed 80% or $140,000 of the purchase with a 30-year fixed-rate mortgage at the median interest rate of 7.17%. For simplicity, let’s assume they never refinanced their mortgage and dutifully made their $1,353 monthly mortgage payment. An unlikely scenario but one we’ll use today for illustration purposes. Over 30 years they would have paid $201,000 in interest for $341,000 in total loan payments. But wait. There’s more! The cost of ownership must account for more than mere mortgage payments. 

Property Taxes

Property taxes must be paid lest they lose the home. This home is located in California which falls under Proposition 13. Prop 13  limits annual property tax rates to 1% of the assessed home value and caps assessment increases to 2% or the rate of inflation- whichever is less. Over 30 years estimated property taxes paid would total $73,500.

Homeowners Insurance

Then there’s homeowners insurance. In the 1990s premiums were much lower than today would have had an average annual premium of $400 for a $175,000 home. In the 2000s the average annual premium would be $700. By 2010-2020 the average annual premium would have been $1,000 which would jump to at least $1,500 each year by 2023. Over thirty years the couple would have likely paid $25,000 for their homeowners insurance.

Home Maintenance

Next is home maintenance. Broken appliances, malfunctioning garage doors, and HVAC systems requiring replacement or significant repairs are not uncommon. Home maintenance costs can vary significantly depending on factors like location, the age of the home, and the materials used. However, a common rule of thumb is that homeowners should budget around 1% to 4% of the home’s value annually for maintenance and repairs but we’ll go lower. Assuming an average of $3,000 spent annually on repairs the couple would have likely spent $90,000.

Calculating the Total Cost of Home Ownership

So to arrive at the true amount of money this couple invested in their home we add their total loan payments, homeowners insurance premiums, property taxes, and maintenance for a total of $529,000 invested in their home.  Factoring in an average four percent appreciation rate of 4% purchased for $175,000 in 1993 this beautiful spacious home could be worth roughly $575,000 today. All this means after accounting for all costs of home ownership their investment would yield a true net profit of approximately $45,500 today.

Now to be fair, homebuyers do not purchase their primary residence as an investment. They buy a home for shelter- a place to live during their working years while enjoying a relatively fixed cost of housing. Without appreciation or securing shelter at a fixed cost homeownership- at least on paper- loses much of its appeal. What we’re after today is a more holistic understanding of the true cost of homeownership and how older homeowners may utilize the home to boost monthly cash flow without the burden of mandatory monthly mortgage payments.

What are your thoughts on the true total cost of homeownership? How could you use such a concept as a reverse mortgage professional? Leave your comments below.