If you think qualifying to buy a home takes financial stamina, budgeting for your home month by month and sticking to a long range plan can require the strategy and dedication of a marathon runner.
Ideally, lenders recommend that no more than a third of your income should go toward housing costs. Here’s what you spend those dollars on:
Home budgeting: recurring monthly expenses
If you successfully figured out how to save for a down payment and budgeted your income to pay off debts like student loans and credit cards to qualify for a mortgage, you may feel like once you’ve bought a house you can relax. The reality, however, is that home budgeting doesn’t stop when you close on your house. That was just the practice run. For as long as you own a home, exercise similar strategies to those you used when your goal was to buy. They can help you manage your income to cover recurring expenses like these:
- Mortgage payments. The Bureau of Labor Statistics’ Consumer Expenditure survey indicates that 58 percent of the one third goes to pay your mortgage. If you have a fixed rate mortgage the payments remain the same, but escrow payments that can include property taxes, homeowners’ insurance premiums, and private mortgage insurance fluctuate. Payment amounts, therefore, are adjusted by your lender periodically to cover increases.
- Property taxes. They increase with the value of your home but are tax-deductible
- Homeowners insurance. Typically insurance premiums increase each year. You may want or be required to have supplemental insurance for disasters such as floods and earthquakes, or elect to increase your coverage if you acquire more valuables. Shop around if this severely stretches your budget.
- Private mortgage insurance (PMI). If you purchased with less than a 20 percent down payment, you may be required to pay PMI for several years until you build at least 20 percent equity, or for the life of the mortgage. Double check with your lender for how long you must pay.
- Homeowners’ association (HOA) dues. The amenities and services provided by an HOA vary considerably. They may or may not include full or partial landscaping services. HOA dues can increase as their budget requires.
- Utilities. These include your power bill, heating fuel, water, sewer, garbage, phone service, cable, and/or internet, all of which can increase.
But that is not all, oh, no. That is not all…
Budgeting for your home maintenance, emergency repairs, and upgrades
You don’t buy a house just to pay the expenses listed above while you let it fall down around you. It’s probably one of the largest investments, if not the largest, you’ll make in your lifetime. You want to maintain its value, and when possible, improve and enhance it. If that one-third portion of your income seems bursting at the seams already, put your money-saving skills to work because you need to put something aside for the following expenses:
- Budgeting for regular maintenance. Routine maintenance includes inspections, replacing worn parts, cleaning, and landscaping. How much do you need to save for maintenance costs? Traditional advice says you can expect to spend annually from one to two percent of what you paid to buy your home, but if you bought an older home, a fixer, or a foreclosure in poor condition, it can likely be more. For a closer estimate, however, consult a home maintenance checklist and price out the current cost of these services in your area — or the price of necessary tools and supplies if you plan to do routine maintenance yourself. Include cleaning supplies and associated costs, too. Add them all up and divide by 12 to establish a budget and a monthly savings plan for routine maintenance — things like changing HVAC filters and annual inspections, gutter cleaning, window washing, and roof inspections.
- Fund for emergency repairs and component replacements. If you know the age of the various components of your home such as the roof, large appliances, furnace, windows, and wiring, for example, you can figure their remaining life expectancy by consulting the longevity chart for home components from the International Association of Certified Home Inspectors (InterNACHI). Research the approximate cost of replacing them, then prioritize budgeting based on when they might conk out. Establishing this type of emergency fund, especially if you expect some of them to need replacing at the same time, can help you manage some hefty expenses when the time comes. If you can’t make necessary repairs or replacements and try to sell the house first, you may take a hit on the selling price or even lose buyers if a home inspector reveals that your house needs expensive repairs.
- Saving for home improvements. Even if your new home is move-in ready, most homeowners have a wish list for future renovations or necessary additions. Prioritize yours on the basis of your home’s condition — is the roof leaking, for example? — then on your comfort or family growth. If you have anything left in your monthly home expense budget, put what you can aside for that dream kitchen, bathroom remodel, or attic bedroom each month.
Buying a home can be one of the best decisions you make, but if you’re a first time buyer, you need to prepare yourself for the financial demands. Serious budgeting — and sticking to your budget when consumer distractions abound — takes fortitude. Are you up for the challenge?
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