You probably became familiar with budgeting long before you thought about buying a house or condo. Keeping your credit straight was part of the path that brought you to home ownership in the first place. But a homeowner budget has a few categories that are different from what you might be used to.
New homeowners have expenses and responsibilities that go beyond those of a renter. (Read: True Cost of Home Ownership) You already know how to budget for utilities, vehicle payments and hopefully for retirement. With a new home, though, you’ll add expenses that come due monthly, quarterly, and annually.
Here’s an example of what you can expect to add to the budget you’ve already got:
Budget for Your Mortgage Payment
Planning for a mortgage payment isn’t the trickiest thing in the book. You’ve been paying rent, so this simply takes the place of that payment. The good news is that payments no longer benefit everyone but you. With each payment you make, the money will be split between interest and principal. The principal will increase over time, building equity in your own home just like a savings account.
Property Taxes are Key Part of a Homeowner Budget
Property taxes come due every year. When property taxes are paid as part of your mortgage payment, as is common, a small part of your monthly payment gets set aside toward your taxes. These small payments are placed into escrow, which is a holding account. When taxes are due, typically once or twice a year, they're automatically paid from the escrow account.
If your taxes are separate, you can expect a tax bill every year. Be sure to save enough monthly to make the payment, or look into making quarterly tax payments if they are available where you live. Receiving a large tax bill that’s due upon receipt can be overwhelming if you haven’t budgeted for it.
Homeowner’s Insurance is Part of Your Finances
Homeowner’s insurance is another monthly expense that might be paid as part of your mortgage. If yours is handled that way, it works the same as with your taxes. Every month, the insurance portion of your mortgage payment goes into escrow. When the insurance is due, the payment is made automatically from that account.
If your insurance is not paid with your mortgage, you’ll need this budget category to set aside money to pay the premium, which usually comes due at the anniversary of when you bought your home.
Your Homeowner Budget May Include Private Mortgage Insurance (PMI)
Not every home owner has private mortgage insurance, called PMI, but many do. If your down payment was less than 20%, you probably have PMI.
PMI protects the lender against default. This insurance is usually paid as part of your regular mortgage payment, but some lenders might take payments separately. The good news is that, generally speaking, PMI terminates automatically once the mortgage balance is 78% of the home’s value but certain rules apply (learn more on the government's Consumer Finance website).
Manage Your Homeowner’s Association Fees / Condo Fees
Homeowner association and condo fees are part of living in certain suburban communities and condos, and are not optional. If you buy in a community or building that requires these fees, your budget needs to plan for them.
Homeowner association fees are paid monthly, quarterly, or annually to the association. These fees help pay for maintenance of common areas such as a park, playground, or swimming pool in the community. Condo fees are generally paid the same way, and help fund building maintenance and groundskeeping. The good news is that condo fees also cover maintenance of your home's exterior.
Emergency Savings Should be in Every Homeowner Budget
Most everyone will have an expensive surprise as a homeowner. Maybe the roof will spring a leak, or perhaps a septic system will require replacement. As a renter, the property owner was responsible for all of the repair and upkeep. As a new homeowner, that responsibility lands on your plate. You'll want to include emergency savings in your monthly homeowner budget, so you have a cushion to fall back on when the unexpected happens.
Save for Home Maintenance
Maintenance is part of owning a home. (Read: Home Maintenance Checklist Saves Money) You’ll need to perform certain tasks regularly, such as keeping the lawn mowed, painting, making small repairs, and also having a a home professional service your heating and air conditioning systems every year. Your homeowner budget needs a category for home maintenance to save up for these expenses that come around every year, saving you money by preventing more costly repairs.
Projects / Upgrades are Long-Term Financial Goals
With home ownership often comes the desire to make what you have even nicer. Separate from your emergency and maintenance savings, another budget category for adding nice upgrades, and even renovating lets you set your goals and work toward them every month. These upgrades will also make it easier to sell your home, so why not enjoy the improvements? You'll also avoid the usual “fix the house up for sale” most homeowners go through before listing their home.
Budgeting is both simple and complicated. It’s a matter of managing what’s coming in and what’s being paid out, while adding money to savings where you need it.
No two homeowners will have the same budget. But some expenses are fairly predictable. Once you know what to expect, you can fine tune your personal finances to work like a well-oiled machine.
Do you have any budgeting tips, or recommendations for ways to balance a homeowner budget? We would love to hear them!