Budgeting is a topic we have explored in great detail at SLIGHTLY EDUCATIONAL. The importance of budgeting correctly and doing your best to stick to that budget is essential to build towards financial independence and in many cases, just keep your head above water. When we bought our first home, our budgets changed drastically and all of a sudden had to account for numerous unexpected expenses. Let’s explore how buying a home affected our budget.
Moving Is Expensive!
Across my life, I average a move every 1.7 years. Needless to say, I am an expert mover! And yet, I am still always surprised by how much stuff I have and how expensive it is to move. When we finally got our slice of the American Dream, it was an especially expensive move for a few reasons:
- We were moving two people’s stuff a greater distance than just across San Francisco. This required a bigger truck and more labor to complete this move which came with an elevated cost.
- We were able to put around 20% down on our mortgage. This was great because we were able to avoid Private Mortgage Insurance (PMI), but this was the biggest expense of our lives. Needless to say, this just about drained our bank accounts.
- Closing costs on the home were surprisingly expensive. Closing costs included prepaid taxes, insurance, escrow fees, underwriting, title transfer, and many other seemingly silly fees. When it was all said and done, our closing costs were over $10,000. I don’t know about you, but we definitely didn’t just have this lying around in our couch cushions.
Professor tip: Start saving early for your next home purchase and associated move. If you’re trying to avoid PMI, plan to at least save up 22-25% of the purchase price to cover moving and escrow costs.
No More Rent
A lot of financial experts recommend not spending above 30% of your gross income on housing costs, but if you live in expensive cities or don’t have a large salary, it’s likely you’re spending more than this. We had a sweetheart deal with our last San Francisco apartment, paying around $3,000 per month for our 1 bedroom/1 bathroom apartment. While a pretty good deal for San Francisco, that is a lot of money going towards someone else’s mortgage.
The most exciting thing about buying a home is that we were able to begin paying ourselves! With a 30-year fixed mortgage, every month about half of what we pay towards our mortgage goes towards interest and the other half goes towards our principal. Think of principal as our ownership stake in our property. In other words, we are paying ourselves every month into our house-shaped piggy bank.
The great thing about moving away from an expensive city is that our mortgage is actually much less than our rent was and a portion of that money is essentially savings.
Professor tip: Homeownership is one of the best ways to build wealth because you are paying yourself to have a roof over your head and the home acts as an appreciating asset.
The True Monthly Cost of Homeownership
There are a lot of additional costs of homeownership beyond just that mortgage that must be taken into consideration when revamping your post-move budget.
- Taxes – Taxes are based on your home’s appraised value and are often due twice a year. Each city and state have different tax rates and these should be taken into account when considering where to move.
- Homeowner association fees – Many houses come with an HOA or additional fees to help take care of the shared community amenities such as community pools, parks, landscaping, security, upkeep, etc.
- Mello-Roos – This fancy-sounding word is a special tax used to pay for a community-specific infrastructure project or service. Only the community that gets the benefits of the project or services pays this tax and it is usually only found in California.
- Utilities – If you’re moving from renting an apartment to owning a home, chances are it is an upgrade in square footage. On top of this, you may be lucky enough to have a yard with mature landscaping that requires constant upkeep. All of this means more electricity, gas, and water usage increasing your monthly utility expenditures.
- Professional services – As soon as you move in, you will likely be bombarded with every serviceperson under the moon, not limited to gardeners, pest control, tree cutters, solar panel installers, etc. We chose to keep the gardener for $100 per month. This was the best decision we’ve made since moving but does add to our monthly budget.
While our mortgage is cheaper than our rent was, when you add up all the additional monthly costs, we are probably close or slightly higher than what we were paying in rent.
Professor tip: Comparing just your mortgage vs. rent is not a true reflection of your monthly costs and will leave you woefully unprepared for the true cost of homeownership. Be sure to research local tax rates and utility rates to make sure you can afford your future home.
Unexpected Costs
The nice thing about renting is that when the toilet clogs or the roof leaks, you can just call your landlord and they have to fix the problem at their expense. When you’re a homeowner, you are the landlord!
Two weeks into loving our new home, we were watching our latest Netflix show on a rainy night when all of a sudden water started pouring through our roof right into our living room. Needless to say, it was a mad scramble to find towels and a bucket. The next morning we called a roofer and within the next week we had a patched roof and our pockets were $2,000 lighter.
When you own a home, especially if the home is an older home, there are bound to be lots of issues. This is just part of the experience and one that needs to be budgeted for. Since moving, we have bolstered our emergency savings on our budget to account for these unexpected costs.
Professor tip: Even new builds will have issues over time. Budget accordingly so you don’t get caught flat-footed when an emergency arises and you have to shell out big dollars to upkeep your home.
Key Learnings
Homeownership is a source of pride and a wonderful tool for building wealth and financial independence. It is also important to keep in mind that homeownership is expensive and your budget needs to evolve to account for these new expenses.
There were two things that really surprised us when we moved that are worth keeping in mind:
- The closing costs were much higher than we expected. Make sure to shop around for your mortgage servicer and do your best to get a full picture of the fees they charge.
- House repairs and upkeep are more expensive than we anticipated. Not only have we had to fix our roof twice, but appliances have broken down and don’t get me started on renovation estimates. We have been able to save money by doing repairs ourselves where we were comfortable (like replacing the toilets). We also included a 1-year appliance warranty as part of the home sale negotiations, which has been helpful in keeping some of our older appliances running.
Overall, our new monthly budget is slightly higher than what we were spending when renting, but now we are paying a portion of that budget back to ourselves in the form of home equity. Budget accordingly so you can enjoy the journey!
Check out additional topics to make personal finance SLIGHTLY EDUCATIONAL on our Personal Finance page.
