What exactly is meant by the effective home building cost per square foot? How would it vary from the simple cost per square foot? The effective cost recognizes the fact that you will not be paying for your home in one lump sum. Instead you will be making payments on your home with interest for many years. In addition you will be paying utilities including an electric bill, and perhaps a water bill.
Home Building Cost per Square Foot: Learning from History
Most people, especially during the period beginning in the 1980’s and ending with the foreclosure crisis, went to their lenders with the idea that they would borrow as much as allowed on a 30 year loan. They agreed to make payments equal to a little over one third of their income. They then wanted to know how many square feet they could possibly afford, often using home builders and contractors who cut corners on structural quality in order to build a large, showy home. Now we can look back and easily say that was not a good idea.
Utility costs increased over the past few decades, making the large and ill constructed homes expensive to heat, and cool. All that square footage may have been cheap at the time, per square foot, but the effective cost was substantial in higher utility bills for every single extra square foot. People’s incomes decreased rather than increase and it became increasingly difficult to make house payments and pay high prices for utilities.
By studying the effective cost per square foot, and building accordingly we can save substantially on real costs. Real costs are the accumulated costs over the life of your home. We will consider energy efficiency, solar energy, the cost of maintenance and the cost of interest. We will work to devise a way to pay less for a home over time, rather than simply looking at how much our borrowed dollar will buy.
By taking some time to investigate your own credit, pay off past due bills and eliminate your credit card balance you can save up to one percentage point on your interest rate. Translated that means you save could save 25% of the interest you would be paying.
By using a mortgage calculator we can see just how much borrowed money can cost over a 30 year period, vs. a 15 year period. Not only are interest rates on 15 year mortgage up to a whole percentage point less than those for a 30 year loan, you will only be paying interest half as long. On a loan for $150,000, compare paying a total of $257,400 over a 30 year loan, to paying back only $185,160. Taking out a 15 year loan, rather than a 30 year loan, saved $72,247 in this example based on current interest rates. On a 1500 square foot house that saves about $48 per square foot on the effective cost of the home.
The important thing to remember about energy efficient insulation is that even if you go with the best and most costly insulation on the market, which is currently closed cell insulation in conjunction with radiant barrier attic insulation, it will pay for itself in about 8 years. All the savings on utility bills can go to your house payment, bringing down that effective cost by approximately $150 per month for life.
Provided you constructed your home well and installed good insulation, solar energy panels could not only eliminate your electric bill, you could get a check every month from your electric company. Solar energy can actually give you money to pay on your house payment, further reducing the cost of your home per square foot.
The smaller your home, the less it will cost to build and to heat and the less money you will need to borrow. Smaller homes are increasingly trendy, and by using space efficiently you can also save on housekeeping and maintenance over time. Consider saving on the cost per square foot by simply building fewer square feet.
By considering the difficulty of future maintenance, you can save a lot of money on your effective costs. When selecting materials consider how long they will last and what repairs they will eventually need. By avoiding future maintenance you are reducing the effective cost of your home.
Cost per square foot, is normally calculated in a simpler way, but it is important to see that the actual cost per square foot is a much more complicated story. It isn’t always about how much borrowed money you spend on your home. The effective cost is related to how long you borrow the money, and how wisely it is spent.