Buying your first home is an important life step for most adults. It is a major change in your financial lifestyle and for many signified the shift from nomadic young professionals to responsible career-people and parents. It means that your living expenses are now building on your net wealth instead of disappearing into a landlord’s pockets. It also means that you have become responsible for a large physical investment, one that will require care and a lot of planning to get the most value for you, your family, and your finances.
If you’ve recently bought your first house or are still deciding on the right property for your needs and budget, no doubt you’ve been reading a lot of first-time homeowner guides and articles. You may have come across tips on how to choose a house, how to decorate, how to maintain the lawn, and the many kinds of maintenance that are required for the home itself and the appliances inside. But today we’re here to talk about something even more serious than keeping your furnace in good repair: your finances.
The Finances of a Homeowner
The biggest day-to-day difference between living in a rented home vs one you own is how your finances work. With a rental lifestyle, all you have to do is make sure you have enough set aside for rent every month, and perhaps renter’s insurance payments as well. If the water heater breaks, the plumbing leaks, or the circuits keep blowing, you call the landlord. All the little expenses that come with keeping a home nice and liveable are not the concern of a renting resident. However, as a homeowner, you are now the landlord you turn to in times of emergency and maintenance. If you’ve never owned a home before, it’s very important to understand all the new financial responsibilities that come with it.
New Homeowner Expenses
- Property Tax
- Homeowner’s Insurance
- Bi-Annual Inspections and Maintenance
- Emergency Repairs
- Home Improvements
Depending on the size of your mortgage payments these additional costs can make it more expensive month-to-month to own your own home, but remember that the costs are also maintaining or improving the value of a property that is all yours. The mortgage becomes equity, the maintenance and improvements become property value for greater profits if you ever sell, and repairs would have to happen either way. Be prepared for these additional costs so that you don’t get caught by surprise.
Let Your Finances Cool
Buying a home means that, most likely, you have just spent the vast majority of your savings and taken out a considerable loan. When you combine this with the changing financial circumstances in terms of monthly or yearly costs of maintaining a home, you’re probably just a little tapped out right now and that is perfectly alright. The problem is that moving into a big empty new house makes you want to spend. The temptation is to start fresh, to fill it with new furniture and release your inner interior decorator.
Seeing your clean new living room and a stack of boxes may make you want to buy new curtains, furnishings, and matching decor for every room in the house. For the DIY-enthusiasts, it’s also all too easy to see a new empty house as an opportunity to start your first big project or all the little improvements that will upgrade your new home from almost-perfect to perfect.
While this is a wonderful and exciting time, our advice is to hold off on the big excited purchases and let your finances cool for a while. Give yourself a little time to settle in, start a new home routine, and let your savings and credit begin to recover. Whether this takes two months or your first year, there will be plenty of time to furnish, decorate, and make improvements.
Sort Out Your Taxes
With the simple act of buying a home, your tax situation has changed significantly. Being a homeowner changes your financial profile in the tax world and a home comes with a surprising number of possible deductions. Not only do you have to pay property taxes, but the amount you pay on those taxes is deductible from your personal tax returns, as is the interest you pay on mortgage each year. If you run a personal business or freelance from a home office, this is another potential deduction, as are losses should anything from storms to vandals damage your home.
The fact of the matter is that there are dozens of possible deductions calculated in very specific ways. Unless you happen to intimately familiar with homeowner taxes and deductions, it’s recommended that you work with an accountant for at least the first year to make sure all your tax-based affairs are in order. Done correctly, you can save a significant amount of money in itemized deductions and make sure to start off on the right foot with the IRS.
Maintenance Costs Less than Repairs
Homeownership naturally comes with the responsibility to maintain the home, though most of us come into homeownership with a vague false impression that homes stand on their own for decades without care. In reality, a home is made of many structural features and appliances that wear out at different rates, need a different amount and type of care, and will cause a home to become unlivable if they break. The roof, the exterior siding, and the foundation are a great set of examples.
Your roof should be inspected and receive minor repairs once every 6-12 months, but if there are no big storms it could be fine for five years at a time. The exterior siding is rated for 7-30 years depending on the material, but if it’s not kept in good condition it could rot, bubble, or peel away well before that time. Your foundation may never need maintenance, but if it ever cracks and shifts, the repairs could be unseemly expensive. Then, of course, there’s the HVAC, water heater, fuses and wiring, interior walls, plumbing, and attic.
Everything about your home has a maintenance schedule and your home will be in much better condition year to year of you stick to it. It’s all too easy to get into a habit of putting things off or delaying maintenance to try and save a few dollars here and there. However, the most important thing to remember is that maintenance is less costly than repairs and installations. If you let something go un-inspected and un-repaired for too long, it will break and result in several thousand dollars for replacement parts and installation. Not to mention that your home will be much less comfortable during this time.
Start a Savings Account for the House
Of course, budgeting for both annual maintenance and the occasional unavoidable repair is something you’re probably not used to yet. Many homeowners make the mistake of having no budget for these new financial concerns with no plan for how to pay for the occasional maintenance emergency. This can result in unexpected debt or a major drain on your personal savings. Instead of letting either routine or emergency expenses catch you by surprise, start a savings account for the house itself.
Every month, budget what you could afford to spend on repairs if they were necessary and put that amount into the home account. This will not only make sure that there is a budget for anything the house might need, it also separates your personal budget that gets spent on groceries, recreation, and family time from the annual budget the house needs to remain in good condition.
Plan for Home Improvement Projects
Almost all homeowners eventually find a way they want to improve the home. Whether it’s a major landscaping project or finally making those built-in bookshelves you’ve always wanted, home improvement serves two purposes. First, it customizes the home you own to better suit your personality, lifestyle, and dream home ideas. Second, it raises the value of the property making it more rewarding to sell if you ever decide to move on.
Know that you will want to make improvements and, if you already do, start working out a budget for the improvements you want to make This could be as little as $50 for replacement cabinet handles or thousands for a contractor to transform the attic into a loft apartment. Once you have your budget set out, start planning to save it up and make sure you understand all the costs involved.
Once you start a home improvement project, keep all the receipts in a permanent file that should be made for the house. These receipts will actually offset your capital gains tax if you ever sell the house because they clearly indicate how much you spent to increase the home’s base value.
All the Right Insurance
Finally, you will want to do some serious thinking about insurance. While your mortgage holder requires you to have basic full-value homeowner’s insurance, there are a number of other types of insurance that form a safety net for you, your household members, and your mortgage. The way to look at it is like this: keeping the house relies on you and your income. If anything interrupts that, you’ll want insurance to make sure the mortgage keeps getting paid while your family sorts out any income problems.
Insurance to Consider
- Life Insurance
- Pays mortgage if you die unexpectedly
- Disability Insurance
- Pays mortgage if you become disabled and can’t work
- Extended Home Insurance
- Look for policies that cover your assets, liability, etc.
Being a responsible homeowner isn’t just about knowing your maintenance schedule and being a good neighbor, it’s also vital that you manage your finances correctly so that there’s always room in the budget for whatever your house needs. For more information about how to prepare to be a homeowner or thrive in your new house, contact us today!