Shopping for a new home is exciting, but the amount of financial planning involved can quickly overwhelm new homebuyers.
From down payments to mortgage rates and closing costs, homebuying requires you to make a long list of decisions that will affect your budget and financial health, probably for the next twenty or thirty years of your life.
If only there were a way to take the edge off your homebuying experience, so you could spend more time enjoying the process and less time worrying about whether you’ve got all your financial bases covered.
Good news! Building a realistic budget can help you significantly reduce the stress, choose a home that you can genuinely afford, and ensure that you can continue building wealth even after you buy a new home.
In this article, we show you what expenses to include in a homeowner’s budget and how to allocate your income in a way that allows you to continue investing and building wealth for your future.
You’ll also discover tips that can help you pay for many of your new homeowner expenses.
Keep reading to find out what you should include in your homeowner’s budget and how to allocate your income for wealth building. But make sure you also check out our article on how to pay off your mortgage faster so you can enter into homeownership with a well-defined plan that helps you come out on top.
Why Planning A Home Ownership Budget Matters
Many bankers advise people about what they “can afford” based on standard formulas for income-to-debt ratios and current salary.
However, mortgage payments aren’t the only expense you take on as a homeowner.
As a homeowner, you’ll take on several financial commitments that you wouldn’t have as a renter, so you can’t use the same budget as you did when renting.
Planning your new budget is the first step in the process, since understanding what you can afford monthly will help you make other decisions, such as:
- How much you can afford for monthly mortgage payments
- How much house you can afford to buy
- How much downpayment you need to save before buying
Don’t let bankers or anyone else convince you what price home to buy based on your max allowance. Banks are motivated to loan you as much as possible because they make money on every dollar you borrow.
Instead, take the time to plan for all the expenses involved in owning a home so that you can make smart financial decisions based on your unique situation.
If you’re looking for mortgage advice or quote comparisons from lenders who won’t pressure you to buy more than what you can afford, consider contacting Credible.com.
Minority Mindset recommends Credible because their licensed agents work on your behalf, for free, to find you the best rates from vetted lenders — and it only takes a couple of minutes to find quotes
The information below will help you plan for homeowner expenses and allocate your income in a way that allows you to continue investing and building wealth, even as a homeowner.
Projecting homeowner expenses
In addition to monthly mortgage payments, there are several expenses involved in owning a home.
In this section, we show you what expenses to consider when planning your new monthly budget. You’ll want to include these expenses in your housing costs as you decide what size mortgage payments you can afford.
Below are some of the housing expenses you’ll want to include in your budget.
Some of the expenses you’ll take on as a homeowner include:
- Mortgage payments
- Homeowner’s and property insurance
- Property taxes
- Homeowners’ or condo association fees
- Home repairs and upgrades
- Additional utility expenses
- Snow removal
Some expenses increase over time.
You can expect insurance, taxes, and homeowner association fees to increase over time.
Be careful about homes with homeowner or condo association fees, since these can sometimes increase significantly over time.
Your early mortgage payments may include property taxes and insurance.
Lenders often require buyers to pay up to one year’s tax and insurance when they sign their home loan.
However, you should still add the monthly costs into your homeowner’s budget, since you’ll eventually pay them directly.
Set aside some money each month for repairs and maintenance.
Home repairs don’t usually happen on a structured, predictable schedule. Yet, you know that things will come up from time to time.
How much you spend on home repairs will depend on several factors, including:
- The age of your house
- How well your home was constructed or renovated
- The cost of contractors in your location
According to John Ghent, president-elect of the American Society of Home Inspectors,
“10 years after construction, a $100,000 house will require $750, or 0.75 percent of its value, in maintenance. That rises to 1.5 percent per year for the next 10 years and reaches 3 percent per year in the third 10-year period.”
Overall, Ghent says the average house may need 50% replacement over thirty years.
To prepare for these costs, set aside some money each month for home repair and maintenance.
A general rule-of-thumb is to set aside an amount equal to 10% of your mortgage payment each month for future repairs and maintenance.
However, you’ll want to estimate your home’s repair costs based on unique factors such as location, age, and construction.
Projecting Typical Monthly Expenses
Remember to include your typical monthly expenses in your future budget. While you’re estimating monthly costs, think about how your new neighborhood will affect your living expenses.
Will it cost more to do things like go to the movies, eat out, join a gym, and pay for the kids’ school activities? If so, include the new costs in your homeowner’s budget.
Here are some typical expenses to include when planning:
- Utilities: phone, internet, electric, gas, water
- Health insurance
- Prescriptions and copays
- Clothing and shoes
- Car insurance
- Life insurance
- Gym membership
- Nights out: movies, museums, theatre, etc.
- Streaming services
- Online subscriptions
- Monthly box subscriptions
- Kids lessons and classes, uniforms, field trips
If you’re planning on having children, please remember to work through a budget that considers whether one parent will leave the workforce or reduce their work hours.
Will you be able to keep up with your bills if one parent reduces their income?
Hopefully, you pay off all your debt before purchasing a home. If not, you may have to compromise your home’s size or quality to budget for debt payments.
If you do have debt, include it in your budget and work aggressively to pay it off.
The more realistically you budget, the more relaxed your life will be when you move into your new home. Try to list every expense that might come up and include it in your monthly homeowner budget.
Keeping Your Emergency Fund Intact
Hopefully, you move into your home with an emergency savings account in place.
If you don’t have a savings fund in place specifically for emergencies, start by saving $2,000. This will protect you from some of life’s most common financial dilemmas like replacing a flat tire or fixing a sudden leak under the sink, without having to bust out your credit card.
Overall, your goal should be to build an emergency savings fund equal to six months worth of living expenses. This will help protect you and your family from major life crises that could threaten your well-being and home.
For example, losing a job or paying for unexpected medical expenses is manageable if you have a healthy emergency savings account.
However, if you don’t have a full savings account, you could quickly end up in foreclosure if something like a natural disaster or pandemic prevents you from working.
Keep in mind that if you need to spend any of your emergency savings, you’ll want to create a plan that will allow you to replenish it as quickly as possible.
Tips To Make Homeowner Expenses More Affordable
You can cover many of the costs related to your new home by saving for a healthy downpayment and comparing mortgage rates carefully before you buy.
Make A Minimum 20% Down Payment
If you make a (minimum) twenty percent downpayment on your home, it allows you to skip the private mortgage insurance costs.
Private mortgage insurance (PMI) protects your lender in case you can’t make your mortgage payments, but it does nothing to help you. Most lenders require you to pay their PMI if your downpayment is less than 20% because a low downpayment puts you in a higher-risk category.
For example, a $285,000 home costs about $285 per month for private mortgage insurance.
You can avoid PMI by putting at least 20% down on your home, which will also lower your mortgage payments and interest costs.
Shop For The Best Interest Rates You Can Find
Paying just one or two points less interest on your mortgage loan can save you a small fortune over time.
For example, if you take out a thirty-year, $300,000 mortgage loan at a fixed 3.5% interest rate instead of a 4.5% interest rate, you save about $173 per month.
Comparing rates before you choose a lender puts money in your pocket that can help offset the expenses of owning a home.
We recommend visiting Credible.com to compare mortgage rates from several lenders so that you can get the lowest possible interest rates.
Comparing interest rates only takes a couple of minutes, doesn’t cost you anything, and won’taffect your credit score.
Comparing interest rates and making a minimum 20% downpayment on your home can significantly lower your monthly mortgage payments. These strategies can go a long way toward covering the expenses related to owning your new home!
How To Allocate Your Income As A Homeowner
Now that you understand what expenses you’ll need to pay for as a homeowner, let’s take a look at how to determine what you can afford.
To ensure that you can continue building wealth throughout your lifetime, reserve a portion of your take-home pay for investing.
Hopefully, you set aside a full emergency savings fund before purchasing your home. While a $2,000 savings fund helps with minor emergencies such as car repairs or phone replacement, a full emergency savings equals six months of living expenses.
A full emergency savings fund helps protect you from losing your home in the event you experience a job loss, major medical expenses, or other unpredictable crises (such as a pandemic).
If you don’t have a full emergency savings fund (equal to six months of living expenses), set aside 75% of your income for spending, 10% for savings, and 15% for investing.
Once your emergency savings fund is in place, Minority Mindset recommends allocating your incoming with our 75/25 method:
- 75% of your income goes toward spending: This includes everything you spend money on, from housing to healthcare to fun money and debt.
- 25% of your income goes toward investing: Always reserve 25% to invest in real estate, the stock market, or your own business.
When you add up your mortgage, home expenses, and living expenses, they should not exceed 75% of your NET income.
You might choose to forgo vacations or drive older cars to afford a bigger house, and there’s nothing wrong with that!
But, always set aside 25% of your take-home pay so you can continue building wealth for your future.
Estimate, Plan, and Allocate For Successful Homeownership
Planning a budget for your life as a homeowner will help you save money, assess what you can afford, and continue building wealth.
Creating a homeowner’s budget before you buy will also help you make wiser financial decisions and better enjoy the excitement of purchasing a new home.
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