Budgeting Tips for New Homeowners

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 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.

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.

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.² 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.

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

Source: International Association of Home Inspectors

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 

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.”