New Year, New Home: Financial Tips for Homeownership in 2024

Understand all costs involved

When many prospective homeowners think of the cost of a new home, the first thing that comes to mind is the mortgage payment. Understanding mortgages is key to making wise home-buying decisions. Gathergood and Weber (2015) stress this point, noting, “The decision to buy a home is crucial, but mortgage complexity can be a barrier for less sophisticated households,” underscoring the significance of financial literacy in navigating mortgage choices. Additionally, it’s important to recognize a new home comes with a variety of recurring expenses that you should be aware of and budget for. First, you must consider several first-time homebuying tips before making your move. In terms of costs, here's a detailed breakdown of some considerations: 

• Property taxes: Local governments assess taxes on your property to fund local services such as schools, roads and emergency services. Typically, the amount varies depending on your home's estimated value and local tax rates. 
• Homeowners insurance: Insurance is essential protection in case of unforeseen events like fires, theft, or accidents. It covers potential damages to your property or liability claims brought against you. Insurance costs can fluctuate from year to year and may affect your mortgage payment.
• Homeowners association (HOA) fees: If your new home is part of a community with shared spaces or amenities, you might be required to pay monthly or yearly HOA fees. These fees cover the maintenance of communal areas, security and other shared services. 
• Utilities: Monthly utility bills, including water, electricity, gas and sometimes garbage collection.  
• Home warranty or service contracts: If you opt for warranties or service contracts to cover repairs, you must set aside an annual fee for these services. 
• Security system: If you've installed a home security system, it may have monthly or annual fees associated with monitoring services. 

It is important to understand these recurring expenses and plan for them to ensure financial stability. A proper budgeting plan prevents unexpected costs and ensures a smooth homeownership experience. Your lender does not have control over these costs. Even with a fixed rate loan, you may experience fluctuations in your mortgage payment.

Establish an emergency fund

Unlike renters, as a homeowner, you can't rely on landlords for repairs or unexpected issues. Systems like plumbing, heating or electrical might fail. Events like a leaky roof after a heavy storm or a broken appliance can happen unexpectedly. So, you should save between 1% and 3% of the home's total purchase price annually for these potential repairs. This dedicated emergency fund ensures you're not caught off-guard by unforeseen expenses.

Prioritize needs over wants

Often, the excitement of a new home brings the urge to decorate, renovate, and personalize every space. However, financial prudence requires distinguishing between immediate needs and future wants. For instance, you should prioritize fixing structural issues or outdated electrical wiring over aesthetic upgrades like new curtains or wallpaper. First, address essential needs to ensure the safety and functionality of your home.

Regularly review your budget

The first few months of homeownership might come with fluctuating expenses as you settle in. Maybe the heating bill is higher than you anticipated, or perhaps you've managed to save on some utilities. Tracking these expenses will help you understand your total home budget. Then, review and adjust your budget regularly to realign your financial goals. 

Shop around for insurance

Homeowners insurance is required with a mortgage loan. However, that doesn't mean you should accept the first quote that comes your way. Different providers offer varying rates based on the age and location of your home and the coverage specifics you choose. Shop around and compare various quotes to get the best deal without compromising on essential coverage.

Plan for property tax and insurance increases

Rarely do property taxes and insurance premiums remain static. More often than not, they increase with time. When planning your long-term budget, factor in potential incremental increases in these areas.

Set a home improvement budget

As a homeowner, you envision improvements or changes you want to make. You can systematically make these upgrades without putting undue strain on your finances. Regularly set aside a dedicated amount for home improvements. This way, you prioritize projects and avoid impulsive spending.

Consider energy efficiency

Energy-efficient homes benefit the environment and lead to tangible cost savings. Investing upfront in energy-efficient appliances, proper insulation or double-glazed windows can reduce utility bills significantly over time. While some of these upgrades might require a more substantial initial outlay, the cumulative savings, in the long run, make them worth considering.

Avoid new debts

Transitioning into homeownership often brings unexpected financial adjustments. Begley et al. (2019) observe, “New homeowners often experience a 'debt spillover' effect, with increases in credit card and auto balances after transitioning to homeownership,” highlighting the importance of adept debt management during this phase. With a new, possibly larger space to fill, the temptation to take on credit for furniture or renovations can be tempting. However, accumulating too much debt can strain your finances. Include a savings plan for significant purchases in your financial New Year's resolutions, or explore DIY solutions that can be both satisfying and economical.

Property tax exemptions

For homeowners, property taxes are a significant annual expense. However, many local governments provide tax exemptions or reductions for specific groups, such as seniors or veterans. If you qualify, apply for any tax breaks you might be eligible. Be sure to speak to a tax specialist to discuss what's best for you.

Stay organized

Homeownership comes with a barrage of documents, bills, contracts and receipts. Keeping these organized, possibly in labeled folders or digitally scanned, can be a lifesaver. Whether for tax deductions, warranty claims or eventual resale, having all your documents readily accessible can save both time and money.

Conclusion

While homeownership is undoubtedly a dream, it's also a responsibility. You need a detailed financial plan to enjoy your new home. Otherwise, failing to budget can cause undue stress. As you make your house a home, let prudent budgeting be the foundation upon which you build lasting memories.

Citations

Gathergood, J., & Weber, J. (2015). Financial Literacy: A Barrier to Home Ownership for the Young?. Urban Research eJournal. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2659264

Begley, T., Gopalan, R., Hamdi, N., & Moser, R. (2019). The Importance of Financial Experience for First-Time Homeowners. Household Finance eJournal. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3490247

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