How to Budget for Your First Year of Homeownership
Being a homeowner comes with a steep learning curve, and many first-time homebuyers struggle financially in their first year of owning a home. After years of saving for a down payment, they are blindsided by the extra expenses that come with buying and owning a house. It’s frighteningly easy to exhaust your cash reserves before you even move in.
Misunderstandings about the costs of owning a home can push people even further into financial distress. You can avoid a lot of this trouble by doing your research and determining how much house you can actually afford. Develop a sample budget to help you prepare for the cost of homeownership and the expenses that come along with it.
Hidden Costs of Homeownership
Here are some expenses prospective homeowners often forget to consider while they are shopping for a new place to live. Keep these figures in mind as you set your budget for a home.
If you’re used to paying for utilities and other costs of living as a renter, it can be tempting to think that homeownership won’t alter your budget significantly — especially if your estimated mortgage payment will be less than what you’ve been paying for rent. However, your new home may use substantially more electricity and gas than an apartment, townhouse, or smaller rental house. Plus, your monthly rent may have included utilities like water or internet.
Each month, most of your mortgage payment will go toward your principal and interest. However, you’ll also pay additional expenses such as property taxes, homeowners insurance and mortgage insurance. Insurance companies assess these expenses annually, but your lender will collect the fees each month with your mortgage payment and hold the funds in escrow. If you choose a home in a neighborhood with a Homeowners Association (HOA), you’ll also have HOA dues to include in your budget.
Furniture and Decor
New rooms could mean new needs. When you buy a house, the furniture you used in your rental may not be a perfect fit for your new home. Paint, curtains, furniture, and other decorative items can personalize your new home but can be a strain on your budget. If the thought of all new furniture and decor is overwhelming, choose one room to finish at a time.
As a first-time homeowner, you may find yourself with a whole new set of outdoor responsibilities — mowing grass, trimming hedges, and keeping weeds at bay. If you buy a home in a neighborhood with an HOA, you may face strict lawn care standards.
Whether you choose to do it yourself or hire a service to take care of it for you, lawn care can get expensive. If you go the DIY route, you’ll need to purchase equipment and supplies to get the job done, such as:
- Hedge trimmer
- Weed killer
- Grass seed
- Pest control products
If you hire a company to take care of your lawn, expect to pay between $100 and $200 per month for basic care.
Once the excitement of buying a new house starts to subside, your focus may shift to how your new home meets your needs. Unless you built a home with custom options, you may eventually want to update or renovate.
Renovations are becoming increasingly common among first-time buyers. According to a 2017 study by Houzz, first-time homebuyers spent an average of $33,800 on home renovations in 2016 — up 22% from 2015. Among all homeowners surveyed, the greatest motivating factor for renovating was a desire to customize their home.
Maintenance and Repairs
Maintenance and repairs can be a major budget killer for new homeowners. Many first-time homebuyers overlook the age of the roof, exterior paint, AC unit, and furnace when they buy a home. Even if you buy brand-new construction, you should begin saving for necessary maintenance updates and unforeseen repairs.
Don’t exhaust your savings to purchase your home; keep some money aside for necessary or unexpected repairs. Some financial experts suggest saving 1-4% of the home’s purchase price each year, depending on the age of your home.
Your homeowner’s insurance should cover damage due to fire or weather, but you’ll still need cash to cover the deductible, which could be anywhere from $200 to $2,000, or more. If you’re concerned about having enough cash on hand in the event of an emergency, look into plans with a higher monthly premium and a lower deductible.
A Sample Budget for Your First Year of Home Expenses
The price for a starter home will vary widely depending on where you live. Looking at average starter home prices around the country and landing somewhere in the middle, here’s a sample budget.
The following sample budget is an example of what your monthly home-related expenses would look like if you purchased a $200,000 home with a 5% down payment. For this sample, we used an online mortgage calculator and the average 30-year fixed mortgage interest rate of 5.10%.
- Loan Amount $190,000
- Property Tax $2,380 (based on national average, 1.19%)
- Private Mortgage Insurance (PMI) $950 (based on a rate of 0.5% of mortgage)
- Homeowners Insurance $1,083 (based on national average)
- Homeowners Association (HOA) Fees $2,400
- Monthly mortgage payment: $1599
Utilities and Lawn Care (based on national averages)
- Gas $82
- Electricity $183
- Water $40
- Sewer / Garbage $20
- Internet / Cable $147
- Lawn Care $150
- Monthly utilities expense:$622
Recommended Maintenance/Repair Fund
- Repairs/ Maintenance $4,000 (based on 2% of purchase price)
- Monthly repair/maintenance savings: $333
For this sample budget, your expenses would work out to $2,554 per month. That’s nearly $1,000 more than your monthly mortgage payment.
Don’t make the mistake of asking how much house you can buy — instead, examine your income and projected expenses to figure out how much you can afford. If you’re buying a home with a spouse or significant other, be sure you’re on the same page.
An experienced real estate agent is an excellent resource. Ask lots of questions: inquire about the home’s roof and exterior, as well as appliances and heating or cooling systems. Your agent can also request information about HOA fees and utility usage from the seller.