The average housing cost for Americans equals a third of their take-home pay. Most people are spending 34.8% or more of their available cash on housing, which can leave a less-than-desired amount for covering necessary expenses, living life and saving for the future.
It's definitely possible to cut your housing expenses down, and who wouldn't want to?
Spending a third or more of your income on one thing can interfere with many life plans. Check out the five tips below to find out how to reduce housing costs.
1. Refinance Your Mortgage
If you own your own home, you can potentially reduce housing costs by refinancing your mortgage. This works because on a large loan spread out over many years, even a fraction of a point in interest can make a difference to overall costs.
Consider this example. If you purchased a $200,000 home five years ago on a fixed 30-year mortgage at 4.25%, your monthly payments are around $984.
After five years of making those $984 payments, the amount applied to your principle is around $18,384, which means you owe $181,615 on your home. If you can now qualify for a refinance loan for that amount for 30 years with an interest rate of 3.75%, your new monthly payments will be around $841. That's a savings of $143.
This tactic doesn't work for everyone. Some times when this might be a good move include:
- You have improved your credit since buying your home and might qualify for a lower interest rate
- Federal interest rates have dropped, and mortgage rates are in general more competitive now than when you bought your home
- You've paid your balance down a good amount, so getting a new 30-year mortgage would spread less money over more time to reduce your monthly payments
2. Find Out If You Qualify for Property Tax Relief
Property tax might only roll around once or twice a year, but it definitely increases your overall housing cost. If you pay $5,000 in property taxes for the year, it equates to around $417 in monthly expenses.
You might be able to apply for property tax relief, though, depending on your age, location and situation. Like many other discounts for seniors, property tax relief is often most readily available to those over 65.
But some locations offer waivers and relief based on income or the type of property you buy. Areas that want to encourage investments in rural housing or downtown reconstruction, for example, might give tax exemptions for those who buy such properties.
To find out if you qualify for property tax relief, visit your state comptroller's website. You can also ask your real estate agent or mortgage broker, as these professionals are often aware of tax requirements.
3. Reduce Related Costs to Make Your Home More Affordable Overall
Often, individuals forget to factor in the hidden costs of homeownership. According to MarketWatch, hidden expenses bring the average housing costs up by almost $9,500 a year for Americans.
Those costs include utilities, taxes, homeowners insurance and general repairs and maintenance. If you want to know how to reduce housing costs without refinancing or kicking property tax to the curb, this might be the right tip for you.
Start by making a list of all the expenses you pay each year related to your home. That might include:
- Electric, gas and water bills
- Lawn care
- Repairs and upgrades
- Security systems
- Homeowner association fees
Next, identify those areas where you can't save money. If you don't want to move, for example, you're probably stuck with your HOA fees.
Then, decide if you can reduce the other expenses. Reduce lawn care costs by doing the work yourself, for example. Utility costs might be saved by installing more efficient appliances, turning lights off when you're not in a room and using digital climate-control systems to keep your air conditioning at a less-expensive setting.
4. Rent a Different Home or Apartment
Because of those hidden expenses, renting can be a less expensive option than buying a home. It also lets you easily change your average housing costs by moving into a new place.
Rent is based on a number of factors, but three play a huge role: square footage, location and amenities. By compromising on any of those, you can drop your monthly rent by a substantial amount — sometimes even hundreds of dollars.
If you can live happily with one less room or bathroom, you can often stay in the same location at a much lower rent. And if location isn't a make-or-break factor, you can move to a less trendy neighborhood and potentially get a break on rent.
Many people overlook amenities, but the upkeep on swimming pools, common areas and tennis courts takes money. Property owners usually get that money by charging more for rent. If you don't care about certain amenities, you can reduce your housing costs by looking for properties that don't have them.
5. Get a Roommate or Rent a Room
If you want to find out how to reduce housing costs quickly and substantially, consider getting someone else to foot part of the bill. Splitting costs with a roommate might drive your expenses down by 50%. If you don't want a live-in roommate full-time, you could also rent a room Airbnb-style to make some extra income to offset average housing costs.
Why Reduce Your Housing Costs?
One obvious reason to reduce your housing costs is to create a more stable financial life. If you're living check to check, even a small amount of savings can make a difference. But even if you're able to save 10% of your pay and cover all your expenses plus fun stuff, why wouldn't you save on housing if you could.
Even small savings could result in huge wins for the future. Consider this: Someone who is 30 years old and saves $50 a month in housing costs could invest that money—investing $50 a month for 35 years at a return of just 5% results in an ending balance of $55,698 when the person hits retirement age.
You might also be interested in: Mortgage Refinancing Advice From 9 Finance Experts