The purchase of a first home is a time of great joy. However, if you are not prepared for the extra costs of owning a home, it can also come with unwanted surprises. Planning ahead for these expenses is the best way to manage finances after purchasing your first home.
New regular expenses
All new homes come with new bills. If you have a mortgage, you will have to plan your mortgage payments into your budget. Even if you don’t have a mortgage, you will still have to pay utility bills that were unheard of before while you rented.
= Electricity =
Even if you paid electric bills for your apartment, the electric bills for a house are going to be higher. If you use high-wattage equipment and your electricity bills were previously covered by your rent, you may be in for a shock.
You can reduce your electrical bills by reducing your overall electricity consumption. In places which adjust the cost of electricity by the time of day, you can reduce costs by doing some chores during off-peak hours.
Electricity bills fluctuate with the season. Summer and winter are the most expensive months because of cooling and heating costs respectively. Turning the thermostat down in summer and up in winter can reduce your electricity bills. So will programming your thermostat to cut down on the amount of heating or cooling while you are away at work.
= Water and sewage =
Residential water costs can be very high, especially in places where clean fresh water is not plentiful or must be brought in from outside. Much of the U.S. fits this description. In some places, water and sewage are run by the same company and are on the same bill. In others, you may get a separate bill for each.
You can reduce your water and sewage bill by reducing your overall use of water. Less frequent lawn watering will make a strong dent in your water bill. Switching to high-efficiency toilets will have about the same effectiveness as fixing a leaky faucet. Reuse gray water to water your flowers.
= House insurance =
You may already have experience with renter’s insurance. House insurance is usually more expensive. Most policies include liability insurance.
Home insurance may not cover damage from common weather events. For example, if your new home is in a region prone to hurricanes or flooding, there is probably a clause which denies coverage for flooding. In this case, flood insurance will cost extra.
Some insurance companies have been refusing to cover homes which are located in areas prone to sewer backup, because fixing this issue should be a city responsibility. However, the homeowner is still on the hook for damages while the lawsuits work their way through the court systems.
= Property taxes =
This is the bitter pill of home ownership. Property taxes pay for local roads, schools, and other civic services. The amount of the property tax is based on a small percentage of the home’s market value. Property taxes may be charged monthly or quarterly.
If you are buying a resale house, your property taxes will be calculated from the time you transfer ownership. Your first bill should come sometime in the next quarter.
If you are building a new home, the picture is a little more complicated. The city probably won’t start sending you property taxes immediately. You may not receive a tax notice for as much as a year. However, the first bill you get will include all property taxes going all the way back to your purchase of the property, which can completely ruin your budget if you are not prepared for it. You may get a small break in estimated market value during the time the house is being built.
If your loan-to-value ratio is greater than 80%, your mortgage lender may require an escrow. This means that your property tax payments are tied directly to your mortgage payments, and the lender will forward the tax money on your behalf. However, you are still liable if a mistake is made. Monitor the statements closely, especially at the start.
Home maintenance costs
All houses require regular maintenance. They also require occasional repairs or replacements, which can be costly. If your furnace suddenly breaks down in the middle of winter, you will have to pay premium prices to get it repaired or replaced in a hurry, because if you don’t, the resulting damage to the house could be much higher. Home insurance does not usually cover basic expenses and repairs.
In a newly built home, anything relating to construction of the home may be covered by a builder’s guarantee. In a resale home, you are responsible for all repairs. However, the previous owner is required to disclose all known issues with the house.
Some new homeowners may have to repay an incentive tax credit which was offered during the early months of the ongoing financial crisis. If you borrowed from your IRA for the down payment, you do not have to repay the money into your account. However, the withdrawal will be counted as part of your income for that tax year, which may put you in a higher tax bracket.
Other countries also often allow a first time homeowner to borrow from their registered retirement account, but they sometimes require this withdrawal to be repaid. For example, you can borrow up to $25,000 towards the down payment for your first home from your Canadian Registered Retirement Savings Plan, but you must start repaying it in the second year following the withdrawal and home purchase, or face substantial tax penalties.