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Budgeting for Your First Home

Friday, September 30, 2022   /   by Laura Larson

Budgeting for Your First Home

Before you start looking for a home, it is a good idea to figure out the expenditures associated with home ownership.

Although the majority of potential buyers are aware of major expenses like mortgage payments and property taxes, there are also lesser expenses like homeowner's insurance, energy costs, and maintenance that go toward the overall cost of homeownership. Before you start the buying process, consider these to avoid unpleasant shocks that could deplete your funds.

Here are some typical "hidden costs" that you might encounter and some tips to be ready for them.

Home repairs and cosmetic updates
You can find things you want to upgrade or need to mend depending on the age and condition of the house. 65% of active consumers, according to data from Thumbtack, are not seeking a fixer-upper. However, the study discovered that the median for-sale home might require close to $30,000 in repairs, and new homeowners should plan to spend $26,900 getting their new home move-in ready. That's a lot more than the $10,000 to $15,000 that the typical millennial surveyed by Thumbtack anticipates spending on maintenance and repairs.

Updated appliances
Appliances are no different from other household items in having a lifespan. The appliances in a newly constructed home should be brand new and covered by a guarantee. Depending on the age and condition of the appliances in a resale home, you may or may not need to replace or repair them.

For the most basic versions, the majority of appliances will cost you at least several hundred dollars. A replacement refrigerator may cost thousands of dollars if bells and whistles are added. Additionally, you might be required to pay for installation, which can be expensive if it calls for modifications to the plumbing or electrical system.

Utility bills
If you’re a first-time buyer, the cost of utilities could surprise you, especially if your previous rental home included utilities. For people in urban and suburban areas, utilities could include:

Water and sewer
Garbage pickup
Natural gas

Rural utility costs could include:
Septic repair and maintenance
Garbage pickup
Wood or wood pellets for heat

Evaluation, maintenance, or replacement of heating and air conditioning systems was the most expensive project, with a national average cost of $3,615. Older homes may be less energy efficient unless they have had new windows put in and/or the insulation improved, and larger homes are likely to cost more to heat and cool.

Homeowners’ insurance
Your location, the kind of coverage you choose, any discounts you may be eligible for, and your insurer will all have an impact on the price of your homeowners' insurance. In general, you should budget $35 per month for every $100,000 in home worth. For instance, if your house is worth $300,000, your monthly premium for basic coverage will be around $105 per month. The price will probably be greater in risky places.

You may want to — or, in the case of flood insurance, you may be required to — purchase a supplemental policy because rebuilding or repairs after an earthquake or flood are typically not covered by regular homeowners' policies.

When you use a mortgage to finance your purchase, the lender will normally include the cost of insurance in your monthly payment and cover the payments on your behalf.

Fees for homeowners associations
Homeowner associations, sometimes known as HOAs, are nonprofit organizations that can set and enforce regulations, provide necessities like water, and take care of the upkeep and repair of neighborhood amenities like swimming pools, roads, and landscaping. HOAs are frequently found in condominiums, townhomes, and planned single-family home communities. They are managed by a board of homeowners, and dues are typically assessed monthly or yearly.

Dues might change based on the requirements of the community and range widely. For instance, an association may increase dues or levy special assessments if it has neglected upkeep or wishes to create something, like a new park.

How to be ready for unforeseen costs
Establishing your intended down payment and your willingness to spend more money on closing costs and renovations are smart places to start. 1–4% of the cost of the residence should be set aside as a general guideline for hidden expenses.

For a sneak peek of what to anticipate, refer to your house inspection. The easiest approach to estimate potential expenditures for improvements and repairs is to have a home assessed before submitting a purchase offer. A qualified inspector can evaluate the plumbing and electrical systems, the roof's structural soundness, and other factors. Some inspectors can also provide cost estimates for various repairs. Knowing what your house could need in advance will help you establish expectations for your budget because even seemingly little repairs can add expenses. Once you are aware of the necessary repairs, you can calculate the true cost of ownership of the home and compare the cost to similar properties that may not require as much work.

Make upgrades and repairs in advance. Consider what needs to be done right away, what can wait, and—if you're handy—what you might be able to do on your own. Be sensible. When you're working and/or taking care of your family, some house renovations, like painting the outside or remodeling the kitchen, might take a while.

Get familiar with your appliances. Additionally, you should request that your inspector test the appliances as part of the house inspection. You should also request that your real estate agent ask the seller how old the appliances are and what the normal summer and winter utility costs are.

Home warranty research
A home warranty, which is a brief service agreement that applies during the first year of ownership and assists homebuyers in covering the expenses of repairing or replacing specific mechanical systems, can lessen some financial anxiety. Home warranties normally range in price from $300 to $800, depending on the level of coverage, and may usually be paid either monthly or all at once. Either you or the seller can foot the bill for one.

Yard Work
Total up the expense of upkeep. Do a sober evaluation of how much time and money you need and want to spend keeping a yard if you're thinking about buying a home with one. Include that in your budget if you don't want to buy lawn equipment or would rather hire someone to do it.

Bottom Line
Just keep in mind that your list doesn't have to be exhaustive; it just has to be near to what you're willing to pay. It can be easier to decide whether the house you want to buy fits your budget if you keep that monthly expense in mind.