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Budgeting Tips for New Homeowners

An accurate home budget can help you plan for the true cost of home ownership.

By Mike Faden | American Express Credit Intel Freelance Contributor

5 Min Read | May 11, 2020 in Life

 

At-A-Glance

Creating a realistic home budget can help you enjoy your new home with less financial stress.

Costs such as maintenance, utilities, and landscaping can add up to as much as your mortgage payments, or even more.

Expect to pay around 1% to 2% or more of your home’s total value on maintenance each year.

Buying your first home is a big achievement—and probably one of the largest investments you’ll ever make. Amid the excitement of finding your dream home, it’s important to remember that home ownership also means handling a variety of new expenses. You may think you’re simply swapping a monthly mortgage payment for your old rent check. But you’ll also be managing a variety of smaller additional costs that can add up to equal—or even exceed—that mortgage payment.1

 

Creating a realistic home budget can help you enjoy your new home with less financial stress. If you’re planning to buy but haven’t yet taken the plunge, a home budget may help you zero in on a house you can afford—and figure out how much you should save before you can buy. If you’ve already bought your new house, a home budget will help you plan for the expenses you’re likely to encounter in the coming years. You can do that by creating a fund to cover ongoing expenses, and then contributing a set amount every month.

 

Here are some of the biggest costs to consider for your new-home budget, which I’ll describe in more detail in the rest of this article: 

  • Mortgage payments
  • Property taxes and home insurance
  • Utilities
  • Homeowners association (HOA) dues
  • Maintenance/Repairs
  • Landscaping
  • Remodeling

 

Mortgage Payments: The Predictable Part of Your Home Budget

This is likely to be your biggest single monthly cost. But it’s also one of the easiest to budget for, because you’ll generally know the size of the monthly payment before you buy your house, and because your payment will remain the same every month if you have a fixed interest rate. Mortgage payments also offer a significant financial bonus that you don’t get when you’re paying rent: Mortgage interest is tax deductible, so the interest you pay reduces your taxable income—which could significantly shrink your annual income tax bill.

 

Property Taxes and Home Insurance Costs Tend to Rise

Property tax payments may be a slightly less predictable component of your home budget than your mortgage. Your property tax bill may increase for various reasons. For example, it may rise if there’s a change in local laws, or a jump in home values in your area. But it all depends on where you live: Many states have imposed caps that limit annual increases or your total tax payment. Like mortgage interest, property tax payments are tax deductible, which may help to offset some of the cost. Don’t forget to budget for homeowner’s insurance, which is essential—and generally increases in cost with your home’s value.

 

 

Think About All Utilities

As a homeowner, you’ll be responsible for all utilities. If you were previously renting, you may have been paying some of these, like phone and electricity bills—but you probably didn’t have to budget for all of them. The utilities included in your home budget may include:

  • Water and sewer
  • Electricity, gas, and heating oil
  • Garbage collection
  • Phone, internet, and cable service

 

Some of these utility costs, like garbage collection or monthly cable subscriptions, are usually predictable. Others are harder to estimate in advance. For example, if you use gas to heat your home in winter and electricity to run air conditioning in summer, you can expect big monthly variations in your electricity and gas bills. You may be able to do some preliminary budgeting using information about average residential usage from your city or your local utility company, or you might even get useful information from your home’s previous owner. Some utility companies offer a kind of smoothing, letting you opt to pay an estimated monthly bill that spreads your expected annual costs into 12 monthly payments, with a periodic “true-up.” That approach is great for home budgeting purposes.

 

Expect Homeowners Association Fees to Increase

If you live in a condo, townhouse, or a single-family home in some planned communities, your home budget will typically include monthly homeowners’ association (HOA) fees. The fees generally cover everyday maintenance of shared facilities and may also be used for other purposes. According to an analysis by the real-estate website Trulia, HOA fees have risen much faster than real estate prices or inflation, largely because the homes are getting older and require more maintenance.In addition, it’s not uncommon for homeowners to have to pony up substantial additional one-time payments if the HOA doesn’t have enough financial reserves to cover unforeseen major problems, like a flood in a shared underground parking structure.

 

Don’t Underestimate Maintenance

New homeowners often underestimate the cost of maintenance and repairs. Experts say you should expect to pay at least 1% to 2% of your home’s total value on maintenance each year, which translates into $5,000 to $10,000 in annual maintenance costs for a $500,000 home.3 Some experts say the cost can be as high as 4% annually.4 That’s just for everyday repairs and replacement of worn-out items: it doesn’t include major remodeling projects. Some factors that affect your maintenance costs include:

  • Your home’s age. Older houses generally cost more to maintain.
  • The climate. You may have to repaint the exterior more frequently if you live in a region with severe weather conditions, for example.
  • Where you live. Repairs generally cost more in high-priced cities.
  • Your home’s condition.Your costs may be higher if the previous owner didn’t keep up with repairs.
  • Whether you can do any of the work yourself. You may save money—but only if you do the job right!

Appliances and furnishings generally don’t last forever, so think about their age when planning your home maintenance budget. For example, carpets typically wear out within 10 years, while water heaters usually last six to 12 years, according to a home inspectors’ industry association.5 If you want your home budget to reflect how professional building managers do it, you’ll want to divide the expected cost of replacing those things by the number of months they should last, and contribute that to a savings fund each month. The accompanying chart can help you get started.

 

 

Life Expectancy of the Items in your Home

 

Item

Expected Life (years)

Refridgerator

9 to 13

Gas range

15 to 17

Microwave oven

9

Central air conditioner

7 to 15

Furnace

15 to 25

Water heater

6 to 12

Carpet

8 to 10

Vinyl floors

25

Wood floord

100+

Asphaly roof shingles

20

Vinyl/fiberglass windows

20 to 40

Source: International Association of Home Inspectors

 

Factor Landscaping Costs into Your Home Budget

If your home has a landscaped back yard, or even just a grassy patch and couple of trees at the front, you’ll incur some landscaping or gardening costs. If you don’t plan to do all the work yourself, it’s worth factoring installation and regular maintenance costs into your home budget. Even hiring a company to mow the lawn may cost $100 to $200 per month, experts say.6 

 

 

 

Budget Separately for Remodeling Projects

Major remodeling and renovation projects typically cost from tens of thousands of dollars to a hundred thousand dollars or even more. If you’re planning a big project and you don’t have enough saved to pay for it, it may make sense to set up and contribute to a separate fund until you’ve accumulated enough cash. Alternatively, you may consider financing the project by refinancing your mortgage or getting a home equity line of credit (HELOC). For more about HELOCs, read “When and How to Refinance a Home.”

 

The Takeaway

Buying your first home is one of life’s major achievements. But making home ownership a highly successful and satisfying experience also depends on effectively managing the expenses you’ll incur after you’ve moved in. A realistic home budget can help you maximize the enjoyment of your new home and minimize financial stress.

Mike Faden

Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations.

 

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express. 

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