How to Budget for the Hidden Costs of Homeownership

by Sophia Bera on April 10, 2019

Lifelong renters are often surprised at the random additional expenses they have to cover when they buy a home for the first time. Because landlords cover a lot of the cost of maintaining their property (or roll that cost into your rent amount), rent is the highest amount you pay for housing per month, while a mortgage is actually the lowest amount you’ll pay. There are lots of hidden costs of homeownership you should keep in mind as you decide whether to rent or buy.

You don’t want to drain your cash reserves to cover the down payment and closing costs and then have nothing left when your dishwasher breaks three months after you move in (and something always breaks!).

Money-devouring costs all homeowners should prepare for

According to a 2017 Zillow report, homeowners spend an average of $9,080 per year on hidden costs of homeownership. Residents of cities with higher costs of living, like San Francisco or Boston, can expect to spend closer to $15,000 per year. These costs can include:

Maintenance and repairs: Professional house cleaning, fixing or replacing broken appliances, renovations and improvements, and more. Don’t get me started on how expensive it is to maintain a large yard! If there’s one thing I remember from owning a house a few years ago, it’s that there’s always another home improvement project on your list.

Utilities: If you moved from a small apartment to a larger house, you’re in for some sticker shock when you get your first utility bills, especially if your former landlord didn’t make you pay for all of the utility bills. You’ll be on the hook for gas, electricity, water, sewer, and trash pickup. And, of course, a larger home (especially if it has multiple stories) costs more to heat and cool than a smaller space. And if you have a yard to water, that will increase your water bills. Can you tell that I really want you all to understand what it takes to maintain a yard?

Property taxes and insurance: These expenses are bundled into your mortgage payment, but they’re variable costs that can increase or decrease over time. Insurance companies raise rates in natural disaster-prone areas (homeowners insurance does not cover flood damage, by the way — you’ll need a separate policy for that). And if you buy in a neighborhood that gets trendier by the day, your property taxes may increase dramatically as the value of your home goes up.

Homeowners associations or condo fees: Don’t underestimate the effect that an extra few hundred dollars per month can have on your housing budget. While it’s helpful when an HOA or condo covers maintenance to the neighborhood or building, this is a lot of money. And if they need to cover more expensive repairs, they may ask all residents to cough up a few thousand dollars each.

How to start your home-maintenance budget

Don’t go over budget in your home purchase: Let’s say you work with a financial planner to determine your home-buying budget (this is a great time to work with a financial planner, by the way!) and you decide that you can afford a $300,000 home. You have $60,000 saved up for a down payment and plan to take out a mortgage for the remaining $240,000. But because you’re an awesome saver with a steady income and an excellent credit score, mortgage lenders pre-approve you for a $300,000 mortgage — $60,000 over your original budget. Should you borrow the higher amount and broaden your home search? No. Just because you’re pre-approved for a higher mortgage amount doesn’t mean you should take it. You’ll be taking on a risk, because the more you spend on paying off your mortgage, the less you’ll have available for other home-related expenses.

Make your savings work harder for you: I recommend creating a separate savings account earmarked for home maintenance. A high-yield online savings account is perfect for this because you’ll earn significantly more interest than you would at most brick-and-mortar banks, which allows your savings to go even further. Plus, you’ll be able to access that money whenever you need it. Plan on setting aside at least 1% of the value of your home each year for home repairs and maintenance. On a $300,000 home, that means $3,000 a year. Divide this number by 12 and set up a monthly contribution to your savings (i.e. $250 per month).

Know when to call in the pros: DIYing home repairs to save money isn’t always the most cost-effective solution. Your time is worth money, and sometimes a professional can complete a repair better and faster. Having a home repair cash cushion means you can hire someone instead of spending your weekend trying to learn how to install a ceiling fan.

Prepare yourself for hidden costs of homeownership that aren’t monetary

Moving out of your community can affect your daily, weekly and monthly routine. Before you move out of a neighborhood in the city that you love to buy a home 30 minutes away in the suburbs that you can afford, consider how other things may be affected by this decision. Do you have friends that you run with after work? A yoga studio that you can walk to? Or is it easy to go to happy hour with your co-workers since you’re close to home? A long commute not only affects your health and body, many people would actually choose to make less money for a shorter commute.

Buying a home is one of the most expensive and complicated things you’ll do as an adult, so it pays to do your research. Really consider how a move will affect all the areas of your life, not just your finances. Talk to friends who own homes to find our what major repair projects they had to tackle in the first year or two as well as how it has changed their lifestyle. You may be surprised that the convenience and flexibility that renting offers may be a good fit for a few more years. Plus, you can allocate your money to reach other financial goals in the meantime.