Budgeting Tips for New Homeowners

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. 

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

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. The property tax deduction is capped at $10,000, whether you’re a single filer or married filing jointly. The cap is $5,000 if you’re married filing separately.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.¹ 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 might underestimate the cost of maintenance and repairs. A commonly referenced rule of thumb is to set aside at least 1% to 4% of your home’s total value every year for maintenance costs. This translates to $5,000 to $20,000 in annual maintenance costs for a $500,000 home. And that’s just for everyday repairs and replacement of worn-out items: it doesn’t include major remodeling projects. Depending on the home, annual maintenance costs could be even higher. 

• 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.² 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.³