The essential guide to budgeting for new homeowners

Ready to buy your first home? While open houses, mortgage paperwork, and the planning of your housewarming party may keep you busy, creating your budget as a new homeowner and uncovering the hidden costs of owning a home should be top of mind as you take this big financial step.

“It’s extremely important to determine how homeownership will affect your monthly budget before you purchase a home and not afterwards,” says Emily Graham Stroud, president and owner of a financial planning firm in Fort Worth, Texas. “One of the biggest mistakes people make financially is house hunting and falling in love with a home before they’ve analyzed their monthly budget.”

“How do I adjust my budget after buying a home?” is a question to tackle as soon as possible during the buying process. It’s critical to not only get a handle on the basics of budgeting, but to also learn some budgeting tips for new homeowners. These can help you avoid money headaches once the ink is dry on your mortgage.

Break down the costs of owning a home

When adding up homeownership expenses, your mortgage payment is just the tip of the iceberg. There are other costs of owning a home beyond what you pay to your lender each month.

John Bodrozic, co-founder of a digital home management app, says budgeting expenses for a first home usually fall into four categories:

• Mortgage, insurance, and property taxes
• Utilities, including electric, water, pest control, garbage collection, internet, and phone services
• Maintenance and repair costs
• Remodeling expenses

In addition to the principal and interest on your home loan, your mortgage payment may also include escrow for your annual property taxes, homeowner’s insurance and homeowner’s association dues (if you live in a condominium or neighborhood with an HOA). If not, you’ll need to separately include these hidden costs of owning a home in your budget.

“If you don’t escrow for property taxes and homeowner’s insurance, then you need to create your own escrow savings account that’s earmarked specifically for these expenses,” Stroud says.

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For example, if your annual homeowner’s insurance premium totals $2,400, you could budget $200 per month toward this cost and stash that money in a high-yield online savings account. You’ll need to do the same for your property taxes. When it’s time to pay for these hidden costs of owning a home, you’ll have the cash on hand to cover all of it.

Include a line item in your budget for home savings

You likely already know all the reasons you need an emergency fund. For instance, they can help you cover unexpected expenses, like a flat tire or an unplanned visit to the doctor. When buying a home, budgeting for new homeowners should also include setting up a separate savings account for unplanned home maintenance and repairs.

Wondering how much should you budget for home repairs? Bodrozic says, “A good rule of thumb is to save between 1 and 4% of the purchase price of your home for annual preventative maintenance and repair costs.”

If you’re dealing with a newer home, Bodrozic says you may be able to aim for a 1% savings goal, as things like the roof, appliances, and heating, and air system should still be in good shape. “If your home is 20 to 25 years or older, a budget of 4% is more appropriate because many of the home’s equipment and assets are near the end of their useful life.”

When determining all the additional costs of owning a home, remember that repair costs may increase over time as the property ages, and you’ll need to adjust your budget accordingly. Bodrozic says keeping up with regular maintenance can help preserve your home’s equipment and structural elements, potentially allowing you to delay spending on major repairs.

Determine your new disposable income

The hidden costs of owning a home could affect how much money you have left over each month after your bills are paid. While your monthly mortgage payment could be less than your previous rent, your property taxes, homeowner’s insurance, and other home-related expenses may mean you’ll pay more on housing each month.

Stroud says if owning a home means having less disposable income each month, then you need to be clear about distinguishing between your wants and needs to better adjust your spending plan.

On the other hand, budgeting for new homeowners could mean monthly housing costs that are less than or equal to what you previously paid in rent. If you have more wiggle room in your budget, you could funnel any “extra” cash into your emergency fund or home maintenance savings.

Once those are fully funded, you could find room in your budget to pay down credit card or student loan debt or increase the amount you’re saving for retirement each month. Note that one of the biggest retirement savings mistakes is not starting soon enough. As you’re working toward your financial goals, be mindful of purchases you may be tempted make as a new homeowner—especially if lower housing costs mean you have more discretionary spending to play with in your budget.

“Many first-time homeowners find that their first home causes lifestyle changes,” Bodrozic says. That could mean buying new furniture, upgrading your TV, purchasing an expensive lawn mower, or rushing into costly renovation projects.

Plan regular budget reviews

Once you add up the hidden costs of owning a home and the not-so-hidden ones, budgeting for new homeowners means regularly reviewing and adjusting your spending and savings plan.

“It’s important to review your home’s budget and expenses at least four times a year, perhaps even monthly if you bought an older home,” Bodrozic says.

Checking in with your budget regularly can help you track and budget for all the costs of owning a home, like maintenance and repairs and seasonal changes that may affect your utility bills. It’s also a good way to stay on top of all of your expenses, not just homeownership costs, and monitor your savings progress, which can help you avoid overspending and taking on debt.

Think ahead

One final thing to consider is how much you will be chipping away at your mortgage over time. Though it’s not one of the things to budget for after buying a home, Bodrozic recommends being aware of how much equity you’re building up in the home over time because it may influence your future housing expenses.

For example, if you took out a conventional loan with less than 20 percent down and are paying private mortgage insurance (PMI), you can request that it be removed once you reach 20 percent equity in the home. This is one of the ways you can remove PMI, which in turn can reduce your monthly mortgage payment. If you think you might consider a cash out refinance at some point to make upgrades or renovations, you’ll need to have equity available that you can draw on later.

Master budgeting for new homeowners

Buying a home can change your life and your budget. Reviewing the numbers and planning your budget before you sign on the dotted line can make a huge difference in creating a positive homeownership experience.

One of the budgeting tips for homeowners is regularly reviewing your finances. This financial checklist can help you stay on top of your budget and on track toward your financial goals.

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