It’s easy to get discouraged in today’s home buying market with interest rates surpassing 5.5 percent and high-priced homes. Throw in current inflation levels, and there is no getting around the fact that home buyers have to be even more diligent than ever to budget for a home.
While the timing may not seem great, with careful planning and preparation you can still make becoming a homeowner a reality. The key is understanding the expenses that come with owning a home and having a budget that works for you.
Unlike renting, the monthly mortgage payment represents only a part of how much money you’ll have to dedicate each month to maintain a new home. And for first-time home buyers, these expenses must be carefully calculated to prevent any surprises down the road.
Budgeting is a fact of life for most people. It’s not fun, but it’s a necessity to achieve financial long-range goals and reduce debt. If becoming a homeowner is part of your plan to build wealth, be rent-free and build equity for your future, knowing your monthly housing costs ahead of time will be critical to your success.
Before you even consider how to budget for a home, make sure you cover the basics:
- Step #1: Meet with a lender to make sure you’re financially ready and able to be a homeowner. While you may be motivated to get out of the rent rut, your credit score and income may need some work. Your advisor will be able to help you get to where you need to be.
- Step #2: Understand the importance of the down payment and how it will impact your mortgage payment. A larger down payment will lower your monthly costs, and potentially remove the necessity of mortgage insurance.
- Step #3: Know there are many out-of-pocket expenses that come with being a homeowner. When you rent, the landlord is responsible for maintenance, taxes, and improvements. When you own, you’re on the hook for all of these items as well as other items like homeowners association fees and utilities.
Beyond the closing costs (including survey, title search and insurance, property taxes, and homeowner’s insurance) due at the time of purchase, there are many other financial obligations that come with being a homeowner. Here are some key parts of how to budget for a home.
There are many costs associated with being a homeowner – don’t forget to make sure you can afford to live in your new home!
When budgeting for your new home purchase, be sure to include the following:
Annual property taxes are based on location
The location of your home will dictate how much property taxes you’ll pay each year. Before going under contract, know how much you’ll be paying in taxes. This information can usually be accessed online through county records. You’ll be able to see how much the taxes have increased (or decreased) over time, and what entities are funded by the taxes. Also, be aware you may challenge your tax bill if you feel they don’t reflect the current market.
Homeowner’s insurance is a required expense
Regardless of whether you need a mortgage or are paying cash, property insurance is a necessity. Mortgage lenders will require proof of insurance before approving a loan, and it’s incredibly important to have adequate coverage, especially during this time of rising home appreciation. This is especially true once you’ve been in your home for awhile and if the neighborhood has seen a significant increase in home values. Remember to review your policy every year, and determine if the coverage is appropriate. If your house is ever damaged, you’ll want peace of mind knowing that insurance will cover the costs of repair.
Utilities and Internet may range in cost
For some renters, utility costs may have been included in your rent. When you own your own home, you’ll have to pay for electricity, heat, water, and sewer costs (unless you are in a condo or townhome which sometimes covers some of these expenses). Keep in mind, these bills may be higher when living in a single-family home. Furthermore, internet costs vary considerably depending on your location and the type of service you need.
If possible, ask the home seller to provide a copy of the utility bill so you have an idea of how much to budget. Remember, your costs might be higher or lower, depending on usage and any planned cost increases by the utility company.
Be aware of Homeowners’ Association fees
Some neighborhoods require membership in an HOA. These associations typically require monthly, quarterly or annual fees to be paid to the governing board. Some homeowners’ associations provide basic upkeep on roads and drainage; others include extensive property upkeep, pool and facility maintenance, garbage pickup, etc. If you are buying a condo or townhome, homeowners’ association fees might include some utilities.
In addition to covering community expenses, homeowners’ associations typically have covenants that homeowners agree to follow when buying a home in the designated neighborhood. These can range from requiring trailers and boats needing to be stored in garages or off-site facilities to dictating the paint colors for your home’s exterior. Before you commit to a home governed by a homeowners association, know all the rules and regulations. Also, have a solid understanding of the dues structure and the historical data on rate increases.
Save for home maintenance and home improvement projects
All maintenance, upkeep, and home improvements will lie squarely on your shoulders as a homeowner. No more calling the landlord to get the kitchen faucet repaired! Your realtor can help you develop a list of service providers who can assist with your home repairs.
Keeping up with the lawn, tree maintenance and snow removal should also be factored into your budget. It is wise to keep a savings cushion available in case an urgent repair is needed (roof leak, appliance replacement, plumbing repairs, etc.). Furthermore, at some point, you’ll probably want to remodel or update your home to add your own personal touch so make sure to set aside money for that, too!
Make sure you consider all current monthly expenses
Often lost in the equation of being a homeowner is that you still need to live your life! Budgeting needs to include food costs, entertainment, travel, transportation and paying off other debts (student and car loans, credit cards, health insurance, etc).
Don’t get yourself overextended financially by purchasing a home that stretches your budget too thin.
Make sure your monthly payment is something that you can reasonably afford by working with a local lender who can walk you through each facet of the purchase. Owning a home allows you to start gaining equity and grow wealth for years to come.