Owning a home is the “American Dream.” But there are budget mistakes new homeowners make that can turn it into a nightmare!
Ever since our culture began emphasizing that property possession is the epitome of personal and financial success, young marrieds have started planning for that big day as soon as they get back from their honeymoon. Only the recent real estate bust has slowed that momentum. When one analyzes what happened in 2008, it is clear the drive to realize that “dream” was the core cause for the collapse of the housing industry – the government and financial institutions pushed those “not qualified” into home ownership. Then they sat back and watched as the smoldering embers of pending insolvency burst into full flame of disaster.
Since a goal of Outofyourrut.com is to give you as much “heads-up” knowledge as possible, if you are thinking of buying your first home, or if you’ve already written a check for that down payment, check out these slip ups you should avoid. These are the items you need to thoroughly master as you develop your monthly budget for the household. Some may seem obvious, other may not. Your best bet is to look at all of them and see how they apply to you.
1. Your Monthly Mortgage Payment
As plain as it may be, some people fail to plan on having to put away enough money out of their income to pay this. Practically speaking, this is the starting point for your planning for buying a house. Honestly examine your income stream and see if there will be enough to make a monthly payment. You might keep in mind that most financial institutions estimate that 30% of your income should be dedicated to housing expenses. A simple calculator to help you with this is at How Much Can I Afford Calculator.
Once you get into your budgeting, work on paying off the mortgage as quickly as you can. Strategies on how to pay your mortgage off earlier include making biweekly payments or making additional principal payments with each payment, or even perioodically.
After your tithing, the mortgage should be the first money you set aside each pay period. Getting behind on it is the first step on the slippery slope of financial disaster.
2. Property Taxes
These are usually paid twice a year, but property tax laws vary state-by-state (and even by county). And the great unknown here is that in some states, property taxes fluctuate year-to-year. Sometimes they can be reassessed at a lower rate, but the reality is that it’s usually a higher amount.
One of the ways you can prepare for this is to request from the property seller a record of at least copies of the past five years’ tax bills. This will give you some idea of the trend. At closing you’ll have to put aside a portion to cover the projected taxes for that year so you will have a strong indication of what they should be your first year in the home.
Immediately start checking with your county’s property appraisal system. There should be w mechanism for you to appeal the value they place on your home. Explore how to do that and keep on top of it.
Watch the local news because they will talk about the “millage rate,” and that’s what really determines how much tax you pay. You might get a reduction in the estimated value, but if the millage rate goes up, then your savings are out the window.
Mortgage companies like you to have “escrow accounts”, into which you pay (as a part of your monthly mortgage payment) money to be held to pay the annual insurance premium and your property taxes. This is kind of a “forced savings” program, but it has the drawback of the amount never going down. The bank always believes taxes will go up, and they have a “minimum” amount you have to keep in escrow.
As soon as you can, talk to the lender and tell them you will escrow taxes and insurance yourself (they will generally allow this if you are putting at least 20% on the house you’re buying). They may object and give you a difficult time, but you should be able to opt out of that additional money. Take it and put it into something that will earn you some interest; a mortgage escrow account earns no interest but they get to use your money…for free!
3. Homeowner’s Insurance
This also varies by state and region, as well as other variables such as whether you have a home security feature or a certain number of smoke detectors. Depending on where you live and what kind of coverage you buy, insurance can run you anywhere between $500 and $1,500 or more a year. It helps to bundle your homeowner’s insurance with other types of insurance, like auto and life. Companies often offer you discounts for doing so!
Your seller most certainly will have insurance in force on the property, so you can just transfer it over to you, but the better idea is to “shop it.” Find three or four alternative companies and get them to give you a quote. Be realistic in establishing the value of the house; more than likely you won’t be able to get insurance for more than the property appraisal amount. And have a good idea of what all your personal property is worth, too. Your goal is to have enough insurance to replace the dwelling and your property in case of a disaster.
At closing you may have to pay a partial year’s premium to the existing insurer. Unless you’ve been able to place coverage yourself, you’re stuck with that, but get to work immediately on replacing it, or, at least, confirming what you have is the best deal around.
4. Hazard Insurance
This includes coverage for many types of natural disasters— earthquakes, floods, tornado or hurricanes, depending on location. With all the massive weather events we have been experiencing nationwide, it’s important to be prepared by having hazard insurance.
They are telling the truth in those ads you see on TV – your normal, average homeowners’ insurance does not include protection against floods (or earthquakes). The government does have a relatively inexpensive flood program. If the plat of your property you receive prior to closing indicates you are in a flood plain, get the coverage. If it is not in a flood plain, don’t worry about it.
5. Condo, Co-op, Or Homeowners Association Fees – And Assessments
If you own a condo, co-op, or townhouse, you’ll pay an annual or monthly fee to maintain the building and grounds. Single-family homes can also have assessments if they are located in a particular area or subdivision with common property. This is common in gated communities with security guards, a swimming pool, tennis courts, clubhouse, playground, or any common amenity that will need eventual repairs and replacements.
Be prepared for these annual fees to go up on a regular basis. I’ve yet to hear of any neighborhood or condo association that lowered its annual fee. Naturally, this is something you would have asked about when you were looking at the house. Get the history of these fees so you can have a picture of where it might be going in the years ahead.
You’re probably paying them anyway as a renter, but chances are they may be a bit more now that you are running an entire home. Think about gas, electric, water, and a couple you probably didn’t deal with as a renter: water, sewer and trash removal. A history of these should be available to you from the seller, but certainly from the utility companies. Don’t rush into automatically transferring your existing utility accounts to the new property. In some cases, alternative vendors may have a better rate than what you pay now.
7. Big-ticket Renovations And Repairs
There is a reason they say to “save for a rainy day.” A new roof can be very expensive! Upgrading the electrical or plumbing, or something icky like sewage line issues, are all major costs. Then, there are also the renovations you may someday want to make to turn your place into a dream home. Updating the kitchen or the master bath can completely drain your savings. Plan accordingly.
Be careful about acquiring a “home warranty.” If you are thinking along those lines, your seller is going to have to be brutally honest about their recent experiences because sometimes “pre-existing conditions” will void a warranty and you get nothing for those monthly payments you’ve been making.
8. Routine Maintenance
It happens. You’ll want to keep some emergency money handy for a plugged kitchen sink, or rusted hot water heater. You’ll probably average a couple a hundred bucks a month in these “unexpected” costs, so build them into your budget now! You can get some kind of idea of these expenses by talking to your seller, and your apartment manager. Be aware that the apartment complex may have a “bulk rate” contract, but you can have some picture in mind by just talking to management, or buddying up to a handyman as he does his work.
9. Pool And Yard Care
You got a pool? You got a big and ongoing expense. Not only the water and power (remember the filter, pumps, and lights) but you’ll need supplies and repairs. Also, insurance companies do not like pools, so to get coverage you may have to put up a fence and take down the diving board.
Remember that little guy who came by and mowed the grass and trimmed the shrubs around your apartment? Well, with a house that little guy is going to be you! You’ll need tools you’ve never owned before so start pricing them before you move it; they’ll be needed before you know it.
10. Moving Expenses And New Furnishings
I knew a guy who lived in apartments his entire life. He always managed to get a good deal on rent because he said he wanted the units “unfurnished.” Then he’d go out and rent the furniture! Don’t think he ever owned a thing except his clothes. Hopefully over the years you’ve acquired a few things you can take to your new palace.
And hopefully you’ve got some friends and family that will help you get moved in and settled. If not, then you’d better start getting pricing from companies as soon as you make an offer on the house. Once you close, things will have to be done pretty quickly.
Can you think of anything I’ve missed, any little items that you’ve encountered when you bought your first house? Let me hear from you about how you took care of your expenses the first year. Share with us any tips or tricks you used to make your money go farther.