How To Budget For New Homeowners

When we talk about home ownership, we focus on the upfront money you need for the down payment and closing costs. Owning a home also means taking on new financial responsibilities, such as ongoing expenses and planning for long-term affordability. While these are important, they are just the tip of the iceberg. Being a homeowner comes with a long list of additional expenses.

In this blog, we will discuss all the expenses to expect, to empower you to make wise budgeting decisions and create a comprehensive homebuying budget in the early years of homeownership.

Understanding Your Homeownership Expenses

Here are some of the major home ownership expenses to look out for. It’s important to create a home budget to ensure you account for all expenses and manage your finances effectively.

Mortgage payments: Your monthly loan payment is often the largest recurring cost.
Property taxes: These are assessed by your local government and can vary widely.
Homeowners insurance: Protects your property and belongings from damage or loss.
Maintenance and repairs: Regular upkeep and unexpected fixes are necessary to keep your home in good condition.

These expenses together make up your total housing costs, which are crucial to consider when planning for homeownership. In addition to these, be sure to budget for other expenses such as utilities, landscaping, and emergency repairs that may arise beyond the main categories listed.

Mortgage Payment

Your mortgage payment is to be expected, and it will likely be your biggest monthly expense, so learning how to manage it can help ensure you stay on track financially.

Review your mortgage statement: Most lenders structure monthly mortgage payments to include principal and interest, with a majority of your payment going toward interest in the early years and the remainder applied to the mortgage principal. Understanding the details of your interest rate, principal, and loan term helps you know how your payments are distributed. A higher credit score can also help you qualify for a lower interest rate, reducing your overall costs.
Know your due dates: Mortgage payments are already stressful, and missing deadlines can result in late fees, penalties, and a negative impact on your credit score. If possible, align your payment date with your paycheck.
Automate your payments: This is one way to ensure you never miss a mortgage payment. It also helps control the temptation to spend the money on something else first, which can end up with you being low on funds.

Property Taxes

If you’re paying your property taxes through an escrow account set up by a mortgage lender, they estimate your property taxes, add them to your monthly payment, and remit them to your local government on your behalf. Property taxes are a significant part of your overall housing expenses. This means your monthly payment can fluctuate even if your loan amount and interest rate remain the same.

Watch out for reassessments: Your local government regularly reassesses property values. If the home value increases, so does your tax rate. If you think your home has been overvalued, you can appeal the assessment.
Budget for the increases: Property value increases often especially in desirable neighbourhoods , which automatically increases property tax. To be on the safe side, build some cushion into your budget for potential increases.

Home Insurance

Like property taxes, homeowner’s insurance is often bundled into your mortgage payment, so an increase can fluctuate your monthly mortgage payment. Be sure to treat it as a flexible budget as well. Insurance costs can rise over time, and increasing premiums may impact your overall budget and the affordability of homeownership. After you pay off your home, you’ll be in charge of the homeowners’ insurance. If you already have renters or car insurance, contact your provider to see if you can get a discount for multiple policies.

Home Owners Association (HOA)

When you buy property in an HOA community, you automatically become a member. You’re required to pay a monthly fee, which may increase over time due to rising service costs, inflation, or new projects.

The fee covers the maintenance of shared spaces, utilities, repairs, and upgrades to these areas.

Utilities

If your new home is bigger than your previous one, especially if you are moving from a small apartment, you need to prepare for the additional utility costs. While some factors, such as water usage, will depend on the number of people in the house, heating, electricity, and cooling may increase in cost depending on the house size and location.

To budget better:

Figure out local rates: Research utility charges for gas, sewage, electricity, and others. Most utility companies list rates on their websites.
Collect the billing history: Ask your real estate agent or current owners to provide the home’s billing history for at least 12 months to help you determine the average monthly cost. Remember to consider the number of occupants from their history and adjust the number of occupants as needed to get correct figures.
Look at average costs in the area: If you don’t get the billing history, check out websites that can give you a rough estimate of utilities based on average usage for your home size and zip code.

Always leave room in your budget for unexpected or fluctuating utility expenses.

Regular Maintenance and Repairs

As a homeowner, it’s important to prioritize home maintenance to retain your property’s appeal and enjoy all the comfort it has to offer. As a general rule, experts recommend setting aside 1-4% of your home’s total cost each year for maintenance costs.

Another way to calculate your maintenance fee is to save a dollar for every square foot in your house. Once you have a rough annual estimate, you can divide the amount by 12 to get a monthly fee.

The funds are used to service the HVAC system, repair plumbing issues such as clogged drains, trim trees, perform yard work, and cover pest control, as well as address big ticket items like roof or HVAC replacement, among other tasks.

Creating a Practical Monthly Budget

Now that you understand your homeownership expenses, the next step is to create a personal budget that fits with your new lifestyle. Creating a personal budget helps you manage all home expenses, including ongoing maintenance and unexpected repairs, ensuring you are financially prepared for all aspects of homeownership. Here are some tips that can help:

List your fixed costs: These include mortgage, HOA fees, loan payments, debt payments, and other similar expenses. These non-negotiables should take priority in your monthly budget. For fluctuating items, start with an average. For example, if your utility bill is $400 during winter and $200 during summer, then log in $300.
Track all your expenses for a few weeks: Before fully committing to a budget, track all your monthly expenses and monthly payments. Even the ones that cost $1 for accuracy – this will help see your spending patterns and where you can make cuts.
Budget for reality: As important as saving is, you want your budget to be realistic. Include expenses like shopping, take-outs, movies, etc, in your budget.
Choose your savings percentage: Savings shouldn’t be “leftovers”; otherwise, your brain will always think you have extra. Pick a percentage (10 or 20% of your income). Go as high as you can.
Review your budget once a month and adjust as needed. Schedule a regular date to review your budget and make adjustments to modify goals and reflect the reality of the figures.

The goal is to create a budget you can comfortably afford and stick to, ensuring your financial stability as a homeowner.

Building an Emergency Fund for Your Home

An emergency fund is the difference between responsible home ownership and financial vulnerability. The fund also helps cover ongoing costs that may arise unexpectedly, such as repairs, property taxes, or insurance increases. Here are some tips on how to build an emergency fund for your home:

Calculate how much you need: If you have a stable job, six months of living should be enough, but if your paycheck fluctuates, it’s advisable to have nine months of expenses. Other factors, such as your overall financial situation—including income, debt, and regular expenses—should also influence your emergency fund target.
Start with what you have: If you’ve just determined the number and don’t have anywhere close to that amount, set a reasonable goal. It could be $1,000, which could cover annoying emergencies, such as new tires. Make direct deposits, no matter how small, to grow your fund.
Consider cash alternatives: Your emergency fund can include low-yielding bond funds, bonds with no withdrawal penalties, or savings and checking accounts. If you go this route, ensure you can cash out without an onerous penalty.
Replenish money you must withdraw: Once you have an emergency fund, the goal is to keep it intact. Always top up any funds you withdraw as soon as you can. Consider finding a side gig if necessary.
Leave this money alone! With some discipline, your fund will begin to grow. Be cautious not to sabotage your future or goals by spending your stash impulsively, especially during holidays.

Tips for Cutting Costs Without Sacrificing Comfort

Your expenses have increased, you’re trying to build your savings account and emergency account. With all these new budgets, it’s time to find ways to cut costs.

Consider used furniture, appliances, and electronics: Furnishing your home with new furniture can be a major expense, but you can save significantly by opting for gently used items from thrift stores or online marketplaces instead.
Turn lawn care into a DIY project: buy a secondhand lawnmower and take care of your lawn. You’ll save money and get some exercise in the process. Who knows, you might even like it.
Replace heating and air filters: This may seem counterintuitive to cutting costs, but having the HVAC system operate effectively helps reduce utility bills.
Rent out your extra room: If you have an unused guest room, consider renting it on Airbnb.

Long-Term Financial Planning for Homeowners

A monthly budget helps you protect your finances in the present, but long-term planning secures your future financial stability. Here are some long-term planning tips:

Plan for major upgrades: To maintain your home’s charm, you may need to perform major repairs, such as roof replacement, furnace replacement, or even a kitchen remodel, every 10 to 20 years. These repairs can cost upward of $80k.
Understand your home loan options: Home buyers should research different types of home loans, including conventional loans, and be aware of requirements such as private mortgage insurance (PMI) if your down payment is less than 20%. Making a larger down payment can help you avoid PMI, reduce your monthly payments, and lower your overall borrowing costs. When planning to buy a home, budget for upfront costs like your down payment and be prepared to pay closing costs at the time of purchase. Expect to pay about 2% to 5% of the purchase price or your home’s purchase price in closing costs and fees. Before starting a mortgage application, consider your gross monthly income and use affordability guidelines to determine how much house you can afford. Your credit score will also impact your eligibility and interest rate for a home loan.
Build home equity: Building home equity comes with opportunities; for example, you can leverage it for a home equity loan. You can start building equity by making extra mortgage payments. Even an extra $100 a month can make a difference.
Monitor property value: Paying attention to your home’s value can help you make informed decisions, such as making home improvements that you’re sure will pay off in the future, like updating bathrooms or improving curb appeal.
Save up for retirement: Don’t focus on the house and forget yourself. Make sure you’re contributing to your IRA and 401(k) account for your golden years.

Final Words to the Newest Homeowner

Buying a house is a major life milestone. To make the best out of it, ensure you make a new budget for your new expenses, budget for your emergencies, and avoid impulsive spending. Go an extra mile to pay more than your set mortgage every month to build your home equity.

At Homeowner.org, we’re here to guide you along the way in your journey regarding all things related to buying, owning, and loving your home. Check out our site for more today.