If you are planning to stay in your Austin Texas home for a long time the answers to these last two questions are important. When you get a mortgage the price you pay per month on your home is fixed. Unless you refinance, or you have an adjustable rate mortgage, you pay the same each month until to pay the house off. Meanwhile, inflation is happening, which has the nice effect of making your mortgage payments seem smaller over time. Unfortunately, most homes use energy supplied by a utility, and the cost of energy is generally increasing for two reasons. The first is inflation. The second is that over time, demand for increasingly scarce fossil fuels is driving up the price of energy. In 2007 American households spent about $2000 on average for their energy needs. In 1997 that number was about $1300. So in 10 years, energy costs rose about 50%!
So let’s take a look at our two homes. Home A, the more expensive one, uses, on average 450 kWh/mo (electricity is measured in kilowatt hours) in electricity, and 40 therms of natural gas each month for cooking, and space and water heating. Home B, the cheaper house, is less efficient and consumes 850 kWh/mo of electricity and 65 therms/mo of natural gas. Let’s say that in the area where these house are located, the utility is currently charging $0.10/kWh and $1.10/therm. Furthermore, we’ll assume that, on average, the price of these commodities will increase about 3% each year (it’s very hard to know what will actually happen here. Energy prices have been very volatile in the past few years. However, if the global economy finds its feet again, energy prices will start to rise quickly again).
Right now, Home A pays $45/month for electricity and $44/month for natural gas. Home B pays $85/month and $71.50 respectively. So at the present, you would save $67.50 each month in energy costs if you chose Home A. Since the mortgage on Home A is $75/month more you’re now only worse off $7.50/month. Suddenly, that $800/year savings has now shrunk down to a much more modest $90!
Now, let’s flash forward 20 years. What’s happened to the cost of electricity and natural gas if it turns out that our prediction about energy prices was correct? If electricity costs $0.10/kWh now, in 20 years it will cost $0.18/kWh. Natural gas prices will have risen to $1.99/therm during that time period. So, now it’s time to recalculate those monthly energy costs. Home A will now spend $81/month on electricity and $79.60/month on natural gas. It’s monthly energy costs will now be $160.60. If we add that to the mortgage payment of $1491, we get $1651.60. How does Home B fare? 880 kWh of electricity will cost $158.40 and 65 therms will be another $129.35. So Home B’s monthly energy costs will be $287.75. If we add that to the mortgage of $1416 we get $1703.75. So in the last year of our study Home B actually costs $52.15 more each month or $625.80 for the whole year!
Over the course of the 20 years, Home A will actually be cheaper than Home B by a few thousand dollars because it is considerably more efficient. If you are looking at new homes, or, if you have an energy efficient home that you want to put on the market, do some research into the efficiency of comparable homes. As you see from our simple example, the results can be significant.