Budgeting for new homeowners starts with understanding all the costs of owning a home. This guide will help you account for new expenses, plan for big projects, lower your debt the right way and save for a rainy day.
Updated:
Apr 22, 2024
If you recently became a homeowner for the first time: congratulations! That’s no small feat these days. However, house hunting, down payments and closing costs are just the beginning. You’ll have to make certain adjustments to your budget and plans that you may not have had to think about while you were renting.
The sooner you can get your budget together, the better. Budgeting may not be a fun task, but it will help protect your personal finances and investment in your new home, leaving you better prepared for the future. Recent events have shown that unpredictable circumstances are always possible, and a balanced budget with a healthy savings account will better equip you to weather these eventualities.
Anticipate New Expenses
When you purchase a home, one of the most considerable immediate changes is that you’ll have a monthly mortgage payment instead of rent. Typically, your mortgage payment will include items like property taxes and homeowners insurance, but not always. Additionally, since both taxes and insurance premiums can fluctuate over time, it’s essential to keep an eye on them.
Homeowners Insurance
Particularly when it comes to homeowners insurance, remember that you have options. If your premiums with your current insurance company increase enough to upset your budget, it may be time to look into other insurance providers. Alternatively, if you find that your current policy lacks the coverage you need, you can always upgrade. We at the Guides Home Team have laid out our recommendations for the best homeowners insurance providers for various situations.
Homeowners Association Fees
Some new homeowners, particularly in townhouses and condos, may be part of a homeowners association (HOA). The fees for these associations, which should go toward the upkeep of community spaces, can be steep, sometimes costing hundreds of dollars each month. Hopefully, you were aware of the HOA fees before purchasing your home. Regardless, make sure to include this item in your budget.
Maintenance Costs
Unlike renters, homeowners are responsible for maintaining their residence and property. Typically, this will involve things like lawn mowing and HVAC tune-ups, but there’s always the possibility that something essential and expensive could break. Thus, you should have savings earmarked specifically for home repair.
The Housing Counseling Network at the National Community Reinvestment Coalition (NCRC) is a HUD-approved collective of agencies made up of mortgage advisers offering guidance on budgeting, credit, financial management and savings techniques. Its director, Ibijoke Akinbowale, recommends planning to spend 1%–2% of your home’s purchase price in ongoing costs for maintenance each year. However, if your home is older or in poor repair, the percentage could be higher.
One way to keep your home maintenance costs lower and more consistent is to invest in a home warranty. This residential service contract helps cover the cost of repairs and replacements for covered home systems and major appliances that break down due to normal wear and tear, but these are not always worth the cost.
You pay a monthly premium, and if a covered item breaks down, you call your provider, who will send someone to diagnose the problem. If it falls under the terms of your warranty, the technician will repair or replace the item for the cost of a predetermined service call fee.
Plan for Big Projects
The big home improvement projects are ones you probably don’t plan on tackling right away but might be necessary a few years down the road. These could also include major, unexpected maintenance projects or upgrades you decide you want to do.
Home Improvement
Even if you didn’t purchase your home with the intention of remodeling your kitchen, for example, you might find that the existing structures don’t fit your needs as well as you thought. For example, if you’re a first-time homebuyer, perhaps you will need to add more usable space as your family grows. Or maybe you just get sick of the carpeting and would rather install hardwood floors. Regardless of the home improvement need, you may want to start saving for it now.
Additionally, no matter how new your home is, you’ll eventually run into maintenance projects that exceed the typical 1%–2% allowance in your budget. For instance, large-scale roof repair is expensive, and partial or total roof replacement is even more pricey. Although you may only need to redo the roof every 20 to 30 years — or before you decide to sell — the project will be much easier if you’ve been setting aside money for some time.
Catastrophic Events
Unfortunately, you may also face events that you couldn’t have anticipated. Homeowners insurance will protect the structure of your home and your most expensive possessions, but it’s not unlimited. Some homeowners are unaware of what home insurance will or won’t cover. Here’s a non-comprehensive list of what typically is or isn’t included in a typical policy.
Standard homeowners insurance typically will cover these:
- Your main dwelling and any outbuildings on your property
- Personal and medical liability
- Fire and smoke damage
- Extreme weather like storms, lightning and hail
- Crimes such as theft and vandalism
- Accidents such as falling trees
Standard homeowners insurance typically will not cover these:
- Earthquakes and flooding (though add-on coverage is often available)
- Termite or other pest damage
- Valuable jewelry or artwork (though add-on coverage is often available)
- Damage caused by neglect, poor home maintenance or normal wear and tear
Additionally, most insurance policies have nuanced coverage options: personal liability, cash value versus replacement, depreciation costs and more. It’s a lot of information to sort out, but it’s worth it to make sure your home is fully protected.
Revisit Savings and Life Insurance
Any time you have a significant life event, it’s a good idea to take another look at the state of your long-term finances, and buying a house definitely qualifies as one of those events.
Emergency Funds
Unfortunately, the world recently got a stark reminder of the importance of emergency savings in the form of a global pandemic. Of course, it doesn’t take a worldwide catastrophe to knock you or your family off your feet — injury or illness can change your financial situation just as quickly.
Experts recommend keeping an emergency fund with enough cash to cover three to six months of necessary monthly expenses. That’s easier said than done, but make sure your emergency fund accounts for all your new expenses as a homeowner.
Life Insurance
Similarly, since your expenses may have increased, it’s also a good idea to determine whether you need to purchase a more robust life insurance policy. Particularly if you have a family who depends on your income, it’s a good idea to price some different policies. You might consider looking at policies that cover only the house (i.e., your new assets) and compare them with policies that cover all your assets together.
Retirement
Finally, take a careful look at your retirement plan to see if it will cover your new set of expenses. For example, if you plan to retire before you’ve paid off your mortgage, make sure you take your monthly payments into account. Several formulas can help you figure out how much of your yearly income you should save based on your age, but regardless of which one you use, the earlier you start, the better off you’ll be.
Make Priorities for Reducing Debt
Since your mortgage is likely your largest and longest debt, you may be tempted to put any leftover monthly income toward extra mortgage payments. However, financial experts typically recommend prioritizing high-interest debt, including the following:
- Payday loans
- Auto title loans
- Credit card bills
- High-interest personal loans
In general, you should begin paying off the debt with the highest interest rate fastest, while paying the minimums on all other debts. Alternatively, you could adopt a strategy of paying the loans with the lowest balances off first, which can help keep you motivated and keep collection agencies off your back. However, you’ll likely end up spending more in the long run. You could also prioritize the debts that will impact your credit score the most, such as payday loans and back income taxes.
Unlike these debts, home loans typically have a lower interest rate, and your home’s value should appreciate over time. Your mortgage is generally considered the “good” kind of debt, like student loans.
If you’re having trouble making a dent in your debt, you can always consider starting a side hustle to increase your income. The internet and the rise of the gig economy have made it easier to monetize your hobbies or connect you with people who need the skills you can provide.
How To Save Money as a New Homeowner
While buying a home represents a significant expense, there are a few steps you can consider taking to help lower home ownership costs over time.
Find the Right Home Insurance Coverage
As a new homeowner, you might not be sure how much home insurance coverage you need or how much it should cost. Doing research can help — talk to your mortgage lender, and perhaps a real estate professional, to help you understand your coverage needs. If you’re worried about high premiums adding to an already high mortgage payment, ask your insurance provider about discounts to help lower costs.
To learn more, check out our favorite home insurance providers for new homeowners:
Consider a Home Warranty
Buying a home warranty plan can help you cover unexpected repair or replacement costs if your home appliances, including ovens and refrigerators, or systems, like your plumbing, electrical and HVAC, unexpectedly break down. These systems and appliances can break due to normal wear and tear, resulting in potentially high repair costs. If a home warranty sounds like a good fit for you, we recommend checking out the following providers:
Shop Around for Affordable Life Insurance
If your family relies on your income to pay the mortgage, you might consider purchasing enough life insurance to pay off your mortgage debt in the event of your death. A life insurance policy can help ensure financial security for your loved ones and prevent them from losing your family’s home. To find the right policy, we recommend shopping around and comparing rates. You can explore plans from the following providers to get started.
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