You can reduce home ownership costs before buying by opting for a more affordable area, a smaller property and a fixed interest rate; improving your credit score; and putting 20% or more down.
After you buy your home, you can lower costs by paying the mortgage in biweekly installments, bundling insurance policies, reviewing (and appealing if needed) your property taxes, performing regular maintenance and improving your home’s energy efficiency.
For even greater savings, consider investing in home improvements. You may also be able to benefit from refinancing your mortgage, a home equity loan or home equity line of credit (HELOC), or a non-debt-based product such as a Home Equity Agreement (HEA).
Looking to buy a home? Make sure you know how to reduce home ownership costs first.
Chances are you’ll need all the cash you can get. The average sales price of a house in the United States has skyrocketed from $39,500 in 1975 to more than $420,900 in 2021.
Source: St. Louis Fed
You also want to have at least $40,224 in cash. In addition, the national average upfront expense for a new home in 2021 – including closing costs, down payment and one monthly payment – was $40,224. If you happen to live in Seattle, Los Angeles or San FranciscoThat figure can go up to anywhere between $80,263 and $100,728.
Reducing home ownership costs is a good idea even if you’ve already bought the property you live in. You can expect to spend up to 4% of the total purchase price on maintenance every year. That’s $14,000 for a $350,000 home – not counting major repairs such as roof or window replacement.
Numbers like these can be daunting.
Relocating to an area with lower property prices and cost of living is one of the most effective ways to reduce home ownership costs.
1. Choose a more affordable area
As you compare areas, don’t forget to look at the property taxes as well as housing prices. Counties set their own rates, and these vary drastically across and within states – from a median of less than $200 a year in Alaska, Alabama and Louisiana to more than $10,000 per year in New Jersey and New York.
2. Buy a smaller property
If you’re buying your first home, less square footage usually means lower ongoing ownership costs. Smaller homes are cheaper to purchase and easier to maintain. You’ll benefit from lower utility bills, property taxes and insurance costs.
Remember, your first house doesn’t need to be your forever home. You may be able to afford a bigger property when the time is right and your budget allows it.
In contrast, investing in a large property in the hope that you’ll grow into it could leave you house-rich, cash-poor and with no funds to put toward other important life goals.
3. Improve your credit score before buying
A good credit history can secure a lower interest rate on your mortgage. To boost your credit score:
Review your credit reports carefully and correct any errors
Always pay bills of all types on time
Maintain a low credit utilization rate
Limit the number of credit cards and other credit accounts you have
Avoid applying for multiple credit accounts in a short time
Don’t close credit card accounts unless absolutely necessary
4. Buy below market value
Foreclosed properties and fixer-uppers can be great opportunities to buy at below-market prices. However, make sure to do thorough research first. If the price seems too good to be true, it may be because the property comes with problems – including ones with costly repairs that won’t reduce home ownership costs in the long term.
5. Opt for a fixed interest rate
Adjustable-rate mortgages have below-market rates for a set initial period that then go up over time. While they can make initial monthly payments more attractive, if you hold the loan long enough, an adjustable interest rate will eventually exceed the going rate for fixed-rate mortgages.
In contrast, a fixed interest rate stays the same for the life of the loan. This protects you from sudden and potentially considerable increases in your monthly payments. Fixed-rate loans may be more difficult to qualify for.
6. Get a 15-year instead of a 30-year mortgage
With a 15-year fixed-rate mortgage, you will pay less in interest over the life of the loan. The downside of 15-year mortgage is that the monthly payment will be larger. Be sure to calculate the total loan costs carefully, and know the payment fits into your budget, before committing.
7. Put at least 20% down
A down payment of 20% or more will save you thousands of dollars in interest over the life of the loan. You also won’t have to pay private mortgage insurance (PMI) each month during the first few years. If you’re already paying PMI, work to get the loan balance to less than 80% of the property’s value, and then apply to remove the PMI.
8. Pay your mortgage in biweekly installments
If you make your mortgage payments monthly, that’s 12 payments a year. However, if you split the monthly payment in half and pay it biweekly, that’s 26 payments – 13 full payments – per year. That one extra payment may not make a dent in your budget, but will save you thousands of dollars in interest, and help you to pay off the loan early.
9. Make one additional payment every year
Have you received a tax refund? Earned a year-end bonus at work? Sold your old bike? If possible, set windfalls such as these aside and use them to make one additional lump-sum payment toward your mortgage principal every year. This can shave thousands of dollars in interest, and several years off the loan’s lifetime.
10. Bundle your insurance policies
Many insurance companies offer discounts if you buy multiple policies from them. This means you may get a better price on your homeowners’ insurance if you buy, say, your auto insurance from the same provider.
If you have high-value belongings such as art pieces, fine jewelry or electronics, look into including them as specific add-ons or endorsements in your homeowners’ insurance. This is often less expensive than pricing out separate policies.
11. Review your property taxes
Have your property taxes gone up substantially? It’s always a good idea to review records; if there are any errors, it can be possible to lower the taxes by filing an appeal.
Start by reviewing your property records carefully at your local real estate assessor's office. Most will be online; you can also call or visit the office. Check that all the information on file is correct, including the square footage, number of bedrooms and any major renovations/additions listed for the property. Local authorities use this data to determine your property taxes, so any errors may be costly.
Next, look at your assessed value. This figure is not the same as market value, and you can usually get information on how it is calculated from your county assessor. If you can prove that the assessed value of similar homes in your neighborhood is lower than your assessed value, you may be able to file an appeal on your taxes.
Each county sets its own rules for appealing property taxes, so consult your local tax assessor for more details on the process.
12. Rent out your property
Some people are able to purchase a multi-unit property, live in one of the units, rent out the rest, and use the cash flow to reduce overall home ownership costs.
If that’s not a viable plan for you, you can still become a landlord even with a single-unit home by renting out your basement, attic or just one room (if it is legal in your area). If you don’t like the idea of sharing your home with full-time tenants, consider renting out seasonally, such as when you go on vacation. Some homeowners even rent out storage space in their garages.
13. Improve your home’s energy efficiency
Things to look for include:
Electrical appliances: Power off and unplug idle electronics. When it’s time to replace an appliance, purchase newer, more energy-efficient models.
Lighting: Replace inefficient incandescent bulbs die off with LED bulbs.
Insulation: Close doors to little-used rooms and closets along exterior walls. If you notice air drafts coming from door frames, windows, vents or outlets, consider patching the leaks, adding door sweeps or replacing the insulation.
Air conditioning: Clean and replace filters often. Depending on where you live, swamp coolers can be more efficient than window units.
Roofing: In warm climates, it can help to invest in a light-colored, reflective roof to reduce upper-floor heat gain.
Temperature: Adjusting the thermostat just a few degrees (up in the summer, down in the winter) can make a big difference in utility bills. A programmable thermostat can make this easier to do.
Water conservation: Install water-conserving fixtures such as a rainwater harvesting system (if allowed where you live) and low-flow faucets, showerheads and toilets.
Landscaping: Stick to native or climate-appropriate landscaping for optimal water savings. Consider planting a large shade tree if your house gets a lot of sun in the summer.
14. Keep up with regular home maintenance
Make sure to check all systems and components in your home often. Skipping on maintenance can result in costly repairs, so be sure to stay ahead of issues before they arise.
15. Take care of home upkeep and repairs yourself
Learn how to do basic home maintenance and repairs yourself instead of outsourcing them. You can mow the lawn, power wash the deck, clean the gutters, tighten loose cabinet shelving or fix leaky faucets for a fraction of the cost. However, it’s best to leave complex or potentially dangerous work (such as most plumbing and electrical work) to the professionals.
16. Buy your own home improvement materials
If working with contractors on a project, ask about policies on materials. If it’s customary for the contractor to charge a mark-up on materials, it may be possible for you to buy the materials yourself. However, when projects are complex and/or may require purchasing, returning and repurchasing materials, it can be more efficient and save more money in the long run by having the contractor manage it all.
17. Refinance your mortgage
Refinancing means replacing your current mortgage with a new one that has a better interest rate or more favorable term. This can save you thousands of dollars over the life of the loan.
Refinancing can make sense when interest rates are lower than what you have, and if you plan to stay in the property for several years. However, keep in mind that the lender will charge fees (and possibly points) for doing the refinance. Refinancing also restarts your loan’s amortization, so compare the life-of-loan costs carefully before taking out a new mortgage.
18. Take out a home equity loan or home equity line of credit (HELOC)
e equity loans and HELOCs allow you to borrow against the equity you have built in your home. You can use the money for uses such as home improvements or debt consolidation.
With a home equity loan, you get a lump sum upfront that you repay after the end of the term. With a HELOC, you get access to an open line of credit that works similarly to a credit card. You borrow as much as you need when you need it, and only repay the amount you borrowed.
The main downside to home equity loans and HELOCs is that they use your property as collateral. This means you risk losing your home if you can’t repay the loan.
To qualify for a HELOC or home equity loan, you typically need:
A credit score in the mid-600s
At least 15-20% equity in your home
A debt-to-income (DTI) ratio of 43% or lower
19. Explore non-debt-based home equity products
If you don’t meet the criteria for mortgage refinancing, a home equity loan or a HELOC – or simply don’t want to take on more debt – consider a non-debt-based product such as a Home Equity Agreement (HEA).
HEAs aren’t loans. There are no monthly payments, interest rates, or income requirements.
Instead, based on the equity you have in your home, you get a lump sum upfront, and the HEA provider receives a portion of the proceeds when you sell your home at the end of the term, usually in ten years. In the meantime, you continue to live in your home. If you don’t want to sell your home after the end of the term, you can buy the provider out.
Equity can often solve problems that debt-based products and DIY home maintenance cannot.
Click here to see how Unlock’s HEA solution can reduce home ownership costs and help you achieve your financial goals.