A household budget consists of both fixed and variable expenses. Fixed expenses are costs that remain constant each month, while variable expenses fluctuate based on usage and lifestyle choices. Understanding the role of fixed expenses is critical for budgeting accurately.

One of the most significant fixed expenses for homeowners is the mortgage payment. A mortgage is a long-term loan used to purchase real estate, with the property serving as collateral. Monthly mortgage payments go towards repaying principal and interest and are usually fixed.

This article will examine mortgages as fixed expenses, discuss their impact on monthly budgets, and provide strategies for managing them. Proper budgeting requires insight into predictable fixed costs, and mortgages typically represent the largest such expenditure in a homeowner’s budget. We will also explore other common fixed expenses and the importance of accounting for them in financial planning.

With a solid handle on fixed costs like a mortgage, households can construct budgets that foster stability and smart money management.

What Are Fixed Expenses?

Fixed expenses are recurring costs that remain the same each month. They are expenses that you cannot easily adjust or cancel in the short-term to free up cash in your budget. Fixed expenses are predictable, regular expenses that enable you to plan your monthly budget effectively. 

Examples of common fixed expenses include:

• Housing costs like rent or mortgage payments
• Car payments 
• Insurance premiums
• Loan payments
• Cable/internet/cell phone bills
• Gym memberships
• Childcare costs
• Alimony or child support

Since fixed expenses do not change, you can plan for them in advance when budgeting each month. This allows you to allocate money towards fixed costs before spending on discretionary items like dining out or entertainment.

The average American household spends 43% of its income on fixed expenses. (Source: Bureau of Labor Statistics, Consumer Expenditure Survey)

What Is a Mortgage?

A mortgage is a loan used to finance the purchase of a home or other real estate. The mortgage provides the borrowing power needed to complete the purchase, while the property being purchased serves as collateral on the loan.

With a mortgage, the buyer makes regular payments to the lender over a set period of time, typically 15 or 30 years. The payments consist of both principal (the amount borrowed) and interest on the loan. As the mortgage is paid down, the buyer builds equity in the home. Eventually, once the mortgage is fully repaid, the property belongs to the buyer free and clear.

Mortgages allow individuals to purchase real estate they may not otherwise be able to afford with cash on-hand. This expands home ownership opportunities to more people. However, mortgages also come with extended payment obligations that must be factored into the borrower’s long-term budget.

Does a Mortgage Qualify as a Fixed Expense?

Yes, a mortgage does qualify as a fixed expense. For most homeowners, the mortgage payment is one of the largest fixed monthly costs. The amount due each month remains constant over the lifetime of the loan (with certain exceptions outlined below). This makes mortgage payments predictable fixed costs that homeowners can plan for in their regular budgets.

Why is a Mortgage Considered a Fixed Expense?

There are several key reasons why a mortgage is treated as a fixed expense:

1. The monthly principal and interest payments are constant.

With a fixed-rate mortgage, the principal and interest payment is the same each month for the entire loan term. This predictable payment allows homeowners to reliably account for the mortgage amount in their budgets.

2. Property taxes and insurance are included in the payments.

Most mortgage payments also include property taxes and homeowners insurance in the monthly amount due. The lender collects these sums and makes the payments on the homeowner’s behalf. While taxes and insurance can fluctuate, they remain fixed monthly costs bundled into the mortgage payment.

3. Early payoff is usually prohibited.

Mortgages are generally closed-end installment loans that cannot be paid off early without penalty. Homeowners must make payments over the full loan term, further establishing the mortgage as a fixed obligation.

4. The loan balance does not fluctuate.

With a fixed-rate loan, the principal debt does not change. Only paying down the balance through the set monthly payments reduces the overall amount owed. The fixed balance makes mortgage costs highly predictable.

5. Mortgage terms are long-term obligations.

Typical mortgages have 15 to 30 year repayment terms. Locking in fixed housing payments over such an extended period cements mortgages as inflexible, long-term fixed commitments for most borrowers. 

How Does a Mortgage Impact Your Monthly Budget?

In most cases, the mortgage payment is the largest recurring monthly cost that homeowners face. 

The cost of housing is the largest fixed expense for most Americans, accounting for an average of 36% of household income. (Source: National Low Income Housing Coalition)

This sizable monthly obligation impacts budgets in several key ways:

• Less cash flow for other expenses. Since such a large share of income goes towards the mortgage, less money remains for spending on non-fixed costs. Careful budgeting is required.
• More focus on cost control. Discretionary spending in other areas often needs to be reduced to accommodate the mortgage payment. Keeping housing below the 36% affordability threshold is ideal.
• Need to factor in other housing expenses. Beyond just the mortgage, other significant housing costs include property taxes, insurance, utilities, and maintenance/repairs. These should be accounted for.
• Difficulty adjusting quickly. Unlike variable costs, fixed mortgage payments cannot easily be cut back in a given month without consequences. Temporary hardship may require major action.
• Long-term commitment. Mortgages represent long duration financial obligations that will persist for years. This impacts overall budgeting and savings goals over an extended timeframe.

In summary, mortgages generally put pressure on cash flow and require disciplined financial planning to support the large, long-term fixed commitment. But this trade-off allows homeowners to enjoy housing stability.

How to Manage Your Mortgage as a Fixed Expense

While mortgage payments are usually fixed, some strategies may provide a bit more flexibility or cost savings:

1. Refinancing Your Mortgage

Refinancing replaces an existing mortgage with a new loan under different terms. This may secure a lower fixed interest rate to reduce monthly payments. Refinancing costs would need to be recouped from the savings over time.

2. Making Extra Payments

Most mortgages allow for extra principal payments as well as prepaying future installments. While this won’t change the actual fixed monthly costs, paying extra can pay off the balance faster and reduce total interest paid. 

3. Setting Up Biweekly Payments

Making mortgage payments every two weeks instead of monthly results in an extra payment made each year. This can accelerate payoff like making extra payments but with less conscious effort.

4. Using an Offset Account

Savings are stored in a linked account and used to notionally reduce the mortgage balance owed. This reduces interest costs without changing required payments.

5. Considering a Fixed-Rate Mortgage

Opting for a fixed rate locks in stable principal and interest payments for the long haul. This provides maximum predictability of the monthly costs.

In most cases, the basic mortgage payment schedule remains fixed. But the options above provide some potential flexibility on the fringes while maintaining the core stability of this essential fixed expense.

The median household debt in the United States is $86,400, which includes debt incurred for mortgages, student loans, car loans, and other fixed expenses. (Source: Federal Reserve Bank of New York)

What Other Expenses are Considered Fixed Expenses?

In addition to mortgages, other major fixed expense categories include:

Auto Loans – Car loan payments tend to be fixed monthly amounts, especially if you have a closed-end fixed-rate loan. Leases may have more variability in monthly costs.

Student Loans – Federal and private student loan payments tend not to fluctuate (unless you enroll in an income-driven plan). These loans generally have fixed terms ranging from 10 to 25 years.

Insurance Premiums – Insurance for health, life, cars, homes, disability, and long-term care feature fixed premium costs when paid monthly or quarterly. Annual policies may increase at renewal.

Child Support/Alimony – These legally mandated payments are set at fixed amounts by the courts and garnished from wages if not paid voluntarily.

Credit Cards – Minimum monthly payments on credit card balances are predetermined fixed amounts, although overall balances can fluctuate. 

Cable/Internet/Phone – Monthly subscriptions for utilities like these tend to have standardized recurring rates.

Gym Memberships – Contract gym memberships often lock in fixed monthly fees for a defined period of time.

Childcare – Daycare or preschool costs are usually consistent weekly or monthly amounts per child while enrolled.

So mortgages, auto loans, student loans, insurance, child support, and basic utilities represent major fixed expense categories for most households, in addition to recurring fees for services signed up for. These predictable expenses allow households to plan budgets accordingly.

How to Budget for Fixed Expenses Like Mortgages

Here are some tips for budgeting to account for large fixed expenses like a mortgage:

• Review all upcoming fixed outflows for the month, quarter, and year so you know what to expect. Don’t forget annual or semi-annual bills.
• Be conservative estimating income, and use take-home pay, not gross pay, to avoid shortfalls.
• Prioritize funding fixed costs off the top before discretionary spending.
• Build up an emergency fund equal to 2-6 months of fixed expenses as a buffer.
• If necessary, look for opportunities to lower certain fixed costs like insurance, subscriptions, or cell phone plans.
• Consider setting up automatic bill pay or transfers to ensure fixed costs are always covered.
• Focus on boosting income through raises, bonuses, income-generating hobbies, or monetizing assets to improve cash flow.
• Be cautious about adding new long-term fixed expenses that will further constrain flexibility in your budget.

Carefully planning for large recurring fixed costs is critical. This prevents payment defaults and allows you to maintain housing stability and good credit.

The average American household pays $4,000 in property taxes each year.(Source: Tax Foundation) 

The average American household pays $400 in homeowner’s or renter’s insurance each year. (Source: Insurance Information Institute)

The Importance of Understanding Your Fixed Expenses

Fixed expenses form the foundation of most household budgets. Knowing what these predictable costs are and when they are due allows you to plan spending and cash flow effectively.

Without insight into fixed costs, you may struggle to budget accurately or ensure sufficient funds are available for critical recurring bills. Failure to pay fixed expenses has consequences like:

• Late fees, interest charges, or penalties
• Services being disrupted 
• Creditors harassing you or damaging your credit
• Forfeiting deposits for broken contracts
• Facing lawsuits or wage garnishment
• Loss of property for unpaid loans/taxes

The average American household pays $200 in car insurance each year.(Source: Insurance Information Institute)

The average American household pays $100 in life insurance each year.(Source: Insurance Information Institute)

In extreme cases, mismanagement of fixed expenses can even lead to bankruptcy or foreclosure.

Clearly, getting a solid handle on fixed costs is a prerequisite to building a workable budget that sets you up for financial stability and success. Accurately projecting fixed spending needs based on contractual obligations allows you to then plan discretionary variable spending in a responsible manner.

So take the time to fully document your fixed expenses, familiarize yourself with payment deadlines, set up reminders, and automate transfers or payments where possible. This puts you firmly in control of managing your vital fixed expenses like mortgage payments as the foundation for smart overall budgeting.