In excess of 60% of Americans own their homes, and while there are certain benefits to ownership, additionally there is a downside: the cost. Maybe you have believed coming up with a down payment was the greatest financial hurdle you’d face, but as you’ll soon come to learn, there are several expenses related to owning a home. Here are some suggestions on how to handle them.
Money suggestions for new homeowners
1. Develop a new budget
Given that your monthly mortgage payment is bound to differ from your previous rent payment, it might feel like a no-brainer that you will have to modify your budget accordingly. But there’s more to it than that, simply because you may find that other costs change by virtue of your new home. For example, if you move from a two-room apartment to a 2,000-square-foot house, you can bet on your heating and electricity costs increasing.
Similarly, if you suddenly have a lawn to maintain, you can expect to spend more money than you would renting an apartment.
As opposed to just substituting your new mortgage payment for your previous rent payment, spend a couple of months tracking all of your current expenses and update your budget to reflect the specific costs of just living in your new home. It’s possible you’ll come to find that you’re spending over you expected, in which case you’ll need to adjust your flexible expense categories, like leisure, to compensate.
2. Prepare to spend money on repairs and maintenance
You’re probably aware that you’ll spend some money on maintenance and repairs for your residence, but you might not realize just how much you may end up parting with. Most homeowners spend 1% to 4% of their homes’ value each and every year on repairs and maintenance.
So if your property is worth $300,000, be ready to invest any where from $3,000 to $12,000 annually on upkeep. And when you need to do something major, like replace a faulty heating system or roof, your costs could climb even higher.
You should therefore aim to pad your emergency savings allowing you to have funds to tap if a significant repair pops up unexpectedly. Most people need a minimum of three months’ worth of living expenses in an emergency fund, but as a homeowner, you should shoot for six months’ worth of expenses or more.
3. Expect your property taxes to go up
Your property taxes depend on the assessed value of your home coupled with local tax rates. When you buy a new home, you’re going to be advised of the current property tax liability — but don’t get too comfortable with that number.
Property taxes have a tendency to rise, even when home values drop. Back in 2000, localities across the U.S. collected approximately $247 billion in property taxes, but by 2010, that number almost doubled to $476 billion despite the decline in home prices from the infamous housing bubble implosion.
Additionally, some localities require property reassessments at certain intervals (for instance each year, every other year, or every three years). If your home is reassessed at a higher amount, you could potentially see an immediate hike in taxes.
To protect yourself, leave some wiggle room in your budget. This way, should you be hit with a significant property tax increase from one year to the next, you will not be scrambling as much to make those payments.
4. Don’t get caught unprepared when big payments come due
A number of people roll their homeowners’ insurance and property taxes into their mortgage payments via an escrow system. The way in which this works is that a lending institution will charge a set amount each month above your mortgage payment alone, put that excess money in an escrow account, and then use it to pay your property taxes and homeowners’ insurance for you. But not all mortgages work this way. Many just have you make your exact mortgage payment and remain responsible for paying your homeowners’ insurance and property taxes on your own.
When you fall into the latter category, you will have to budget accordingly so you are not caught unprepared when these larger payments roll around.
The typical U.S. household spends $2,127 on property taxes each year, however in many states, that number is much higher. Take New Jersey, as an example, whose average annual property taxes exceed $7,000 and, in a few counties, can easily top the $15,000 mark.
Most homeowners pay property taxes quarterly, and if yours are $4,000 per year, that’s an extra $1,000 check you will have to write every 90 days. Rather than scramble to come up with that money, you should definitely budget $333 monthly for property taxes. Along these lines, the typical annual homeowners’ insurance premium in the U.S. is $952. For anyone who is required to make that payment all at once, you’ll want to set aside money each month in anticipation.