If you’re buying a home, you’re probably focused on the upfront costs: your down payment, interest rate, and purchase price. These costs will dictate how much you pay upfront and how much your monthly mortgage payments will be going forward. To aid your home search, you might create a budget around the estimated monthly mortgage payments you will be able to afford. While this is a good start to your purchase preparation, you won’t want to stop there. Making a home buying budget strictly based on the estimated monthly mortgage payments you can afford might put yourself in a difficult financial position down the road.
What cost catches buyers off guard?
Many home buyers – especially first-time buyers – don’t create an accurate budget for their purchase. They’ll take into account the down payment, the monthly mortgage payments, and maybe the monthly insurance costs; but one cost they won’t think of is the maintenance expenses. When you rent a home or apartment, you have a landlord that takes care of maintenance. So, when you’re making a budget for buying a home, the thought of routine maintenance costs might slip your mind. And if your mortgage payments were already pushing the limit on your budget, the maintenance costs could put you in a financial crunch you weren’t prepared to handle.
According to a recent survey by YouGov and Bankrate, the most common home buying regret was being ill-prepared for the cost of maintenance. Though that was the most common home buying regret for Baby Boomers, Gen X, and Millennials, it was far more common in the youngest generation of the three. Twenty-six percent of younger Millennial homeowners (ages 25 to 31) felt ill-prepared for their high home maintenance costs. In comparison, 13% of Boomers were caught off guard by high maintenance costs.
"This is such a common regret because prior to owning a home, people are used to these costs being the responsibility of their landlords," explains real estate broker Kris Lippi. "This is most especially true for first-time homeowners."
How to make a more accurate budget for buying a home:
There are a couple of different tactics that can help you better prepare yourself (and your budget) for buying a home. First, make sure you set aside some money for maintenance expenses before you buy the home. Laura Adams, a real estate expert with Clearsurance, recommends setting aside 1% to 3% of your home’s purchase price for maintenance costs every year. If your home costs $250,000, consider saving $2,500 – $7,500 for home maintenance every year. "It isn't easy to know precisely how much ongoing maintenance will cost,” says Adams. “It depends on your amenities, such as a large yard, swimming pool, or aging appliances."
You can also gain a better understanding of the costs by talking to different homeowners and doing research on your own. If you’re looking at buying a home with a pool, find out how much pool maintenance will cost per year. If you’re interested in purchasing an older home, talk to different homeowners who maintain a home built around the same time. The age of your home can really impact the various maintenance costs. Ultimately, you might consider talking to the current homeowner of the property you’re interested in purchasing. They would know better than anyone else how much it costs to maintain that particular home and likely will be able to give you the most accurate estimate of added expenses.
Preparation is half of the home buying battle. The more prepared you are – both financially and mentally – the smoother your transition will be. Talk to a financial advisor for more tailored budgeting advice, and when you’re ready to explore different home financing routes, let us know.