Homeownership: UNDERSTANDING THE COST

Making the transition from renter to homeowner is
exciting and can be less stressful if you’re financially
prepared.
Even if mortgage principal and interest payments are comparable to your
rent, you also need to pay property taxes, homeowners insurance and
possibly homeowner association dues. Beyond those costs, you need to
have funds available for maintenance and repairs. Allow yourself some
time to adjust to your new housing costs and to make a financial plan
before spending on extras such as decorating and home improvements.
Financial preparation for homeownership
First-time buyers typically focus on gathering funds for a down payment
and closing costs, but when you buy a home, you should keep some cash
reserves available for emergency expenses and continue to set aside
money from each paycheck to rebuild your savings.
Your financial plan should include a section for housing-related
expenses, including:
• Property taxes. Most people pay their property taxes through an
escrow account collected with their principal and interest payment, but
it’s also possible to pay them directly. Either way, these taxes must be
part of your budget.
• Homeowner’s insurance. Your basic homeowner’s insurance policy, a
mandatory policy required by lenders when your finance your home,
covers damages to your house and your personal property. However,
you could need supplemental insurance to cover floods, earthquakes,
sewer back-up and other potential risks depending on where you live.
If you have jewelry, expensive computer equipment or other valuables,
you could need supplemental insurance to cover them fully.

• Utilities. As a renter, your utilities may have been included or you were
limited to just an electric bill. Now your utilities could include gas,
electricity, water, sewer and trash removal as well as cable and Internet
service.
• Homeowner or condo association fees. Make sure you understand any
mandatory fees and what they cover. While it’s typical to cover common
area maintenance, some association fees include gym membership, a
swimming pool, trash collection, snow removal and even some utilities,
which could end up saving you money if you don’t have to pay for those
items yourself. Be aware that some associations can collect a special
assessment for a major project, so ask if there’s a chance that a special
assessment would be required.
Maintenance budget
Now that you can’t just call your landlord, you’ll need to maintain the inte-
rior and exterior of your home, including any landscaping. How much you’ll
need to spend on things like lawn and garden care, window washing, fur-
nace filters and possibly snow removal varies according to several factors.
Financial experts recommend setting aside one to three percent of the
purchase price for maintenance. For example, if your home cost $250,000,
you should save at least $2,500 annually for maintenance or about $200
per month. If you don’t use that money one year, it can be saved toward a
future major repair or renovation.
However, your individual financial plan should take into account the age
and size of your home, the condition, the durability of the materials used in
your home, the age of your appliances and systems and your climate. The
maintenance budget for a relatively new one-bedroom condo should be
vastly different than the budget for an older, larger single family home even
if they both cost around $250,000.
One way to keep maintenance costs as low as possible is to take care of
problems immediately before they lead to bigger issues. For instance,
ignoring a small leak can result in rotted wood flooring and mold, both of
which are costlier to remedy than a leak.
You can also keep maintenance costs in control if you learn how to do
some small tasks yourself and know when to bring in a professional. A
home warranty can provide some financial support for repairs and a service contract on your furnace or other systems can also ensure regular inspections and maintenance will be done to increase their longevity.