This post is from our regular contributor, Kristi.
Many Americans view homeownership as the quintessential achievement of the American dream.
Two kids, two cars, a home with a white picket fence, and money set aside to last through the retirement years. The picturesque malarkey of Hollywood.
I was one of those doe-eyed believers in the American dream of homeownership.
The moment the realtor placed the key to my first home in the palm of my hand was one of those life-altering, forever frozen in time moments. I was relieved that the grueling home-search process was over, giddy about owning my first home, and excited about what homeownership meant for my future. The world was my oyster, and that key was my pearl.
Boy, was I in for a rude awakening. That first year of homeownership taught me more about construction, repairs, and money than I would have ever known without getting elbow deep in the financial muck of owning my own home. I made a lot of mistakes that first year, but each mistake made me smarter, stronger, and more able to protect my finances in the future.
Don’t fall into the same traps I did. Learn from my mistakes how to better protect your finances if you decide to make the commitment of owning a home.
Expect the unexpected
My doe-eyed innocence lasted no longer than 48 hours. I was thrown unceremoniously into the harsh financial realities of homeownership, for which I was woefully ill-prepared. Why 48 hours? Two days of wear on the plumbing was sufficient to cause a back-up of the tree-root invaded pipes in our home.
Not only did I have to pay a plumber to flush our system with root killer, but I was suddenly faced with the painfully expensive but necessary cost of cutting down the six offending trees whose roots were wreaking havoc on the plumbing. $300 to the plumber and $3000 to the tree removal company on my credit card later, I could once again wash my hands without threat of water spilling back out onto the floors.
Ironically DC had a similar issue when he bought his first home. Read about it in The Worst Plumbing Problem: Sewer Line Issues and How Complaining Saved Me Thousands of Dollars.
With homeownership, literally anything can happen. Bizarre, funny, or tragic, homeownership has its weird and unexpected quirks. If you want to invest in a home, you need to expect the unexpected. I didn’t even know that roots could invade plumbing before signing on that dotted line.
Bizarre things will happen, and unexpected expenses are just part of the reality. A little bit of foresight to understand that things could happen will make it less of a shock when they do.
Invest in a home warranty
Part of expecting the unexpected is to invest in a home warranty. Incorporating the expense of a comprehensive home warranty into our budget would have saved time, money, and headaches that first year. But we didn’t, so we wasted a lot of time, spent a lot of money, and had a lot of headaches from the complications our new home created.
We learned the hard way that things break consistently, and unless you have some sort of warranty or insurance policy, you will be paying large sums out of pocket to make the repairs.
By spending as little as $500 up front for the year, you can have the financial back up you need for when, not if, something falls into disrepair on your home. You will recoup the cost after just a few service calls or the replacement of a broken-down appliance.
Budget for those unexpected expenses
Even if you do have a home warranty or comprehensive coverage through your home insurance policy, you will still have to pay service tech fees and deductibles when things go awry. You won’t have a realistic idea of the monthly expenses which can accrue outside of your mortgage payment until you have lived in your home for a time. Filters need to be replaced, windows and sinks need re-caulking, roof shingles fly off in storms, pipes burst, and H-VAC units break down.
If you are still looking for your first home, consider budgeting a home-repair emergency fund into your monthly mortgage payment number. If you can only afford $1800 a month on your mortgage, then look for a home in which you can live for $1600 a month instead. Set aside that extra $200 a month into an interest bearing savings account which you can access throughout the year to pay for the unexpected expenses associated with owning a home.
As that emergency fund grows, you will be better off down the road when you have to face the more expensive repairs like paying for a new roof, a new H-VAC system, or even rewiring the electrical in your home. You don’t want to be facing a vitally necessary repair that will put you ten to twenty thousand dollars in debt.
Don’t let renovation excitement cloud your judgement on equity
It’s easy to get caught up in the excitement of having your own place and putting your personal mark on your home. When I first moved into the house, I was excited, and I wanted to get everything done at once. Our first home was a fixer-upper, and we wanted to get started as soon as possible on renovations to fix and improve it. We just assumed that all of our hard work would build equity into the house.
Unless there is a gaping hole in your kitchen floor, I strongly suggest waiting to do any sort of renovation projects until after your first year as a homeowner. We spent way too much money on home repair that first year. Some of the repairs we chose to take on probably could have been put on the back burner for a while.
If we had waited at least a year to start our renovation projects, we would have had a better picture of the market for our home and whether the scale of our renovations would have actually built any equity. Unfortunately, the real estate market continued to decline after we bought our home, making any repairs not worth the investment. Our home quickly became worth less than we owed on top of the money essentially wasted on home improvement.
Proceed with caution
My first experience as a home owner definitely marred my perception of the American dream of homeownership. I wouldn’t go back and do it over though, because buying, living in, and renovating a home gave me an education in finances which has to be experienced, not taught.
The biggest lesson I learned from that first year is this: Don’t expect to move into your home and have it picture perfect immediately. Some projects take much longer and cost way more money than you think they will. Also, if you decide to take make the commitment of homeownership, plan ahead. Expect and budget for the unexpected. Protect your finances by watching the market, and don’t make any unnecessary renovations which won’t improve the value of your home.
It’s great to be excited about moving into your first home, but be aware and don’t let the thrill of having that key in your hand cloud your judgement. Your future finances will thank you.
Are you considering buying your first home? If you already own, what financial lessons did you learn from that first year of homeownership?
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I once read to budget 10% of your mortgage amount for home repairs. I live in a 100+ year old house and that advice is good – for brand-new homes. I’m going to say budget 10% for every 25 years old them home is. If it’s 38 years old, but 20% of your mortgage for repairs. This dampens the idea that the cheaper, older home is a better buy when you factor in the repairs you’ll need. Since so many of us look to get the most home we can for the least money, this levels the playing field more. If you find out your home was in great shape – now you have extra money to put toward retirement. Win-win.
I just bought a new condo and wow are the repair costs adding up. I agree not to get renovation crazy (or, on the other hand, save up BIG for a renovation when you move in so you’re dealing with fewer of these repairs later). I haven’t heard great thing about home warranties (sounds like it’s mostly for appliances?) but goodness knows I’m never going to skimp on insurance.
This is great advice for homeowners. Even if you get a steal on your house because it’s in poor condition, it’s worthwhile to think through what the minimum necessary repairs and upgrades are. Even these will end up being expensive.
I would say between home repairs, modest upgrades, yard work, insurance and taxes around $6K per year is a reasonable estimate for home ownership- this takes into account things that you’ll only do every 20-30 years like siding and roof too.
I got extremely lucky when I purchased my condo and I’ve had only very minor fixes to make. I like the idea of a home warranty, although I wonder how much that would cost. I find that just keeping a big emergency fund is the best way to accommodate unexpected home repairs.
48 hours later!?! Wow, that’s a quick initiation period into the not so glamorous aspects of home ownership!
indebtedmom 10% per 25 years, I like that. We would have had to save about 30% of our mortgage allotment at that time to follow that rule.
taylorqlee We decided to buy a home warranty just this year actually, since we’re now renting out the home. The warranty covers all major components like appliances, plumbing, garage door, HVAC etc. I have found it to be worth the investment.
Hannah UnplannedFinance We had a skewed perception of renovation and upkeep costs, for sure. Every project we took on cost at least $500 more than we were expecting.
Ali_AnythingYouWant We purchased our warranty during a promotional deal, so we were able to get the basic home warranty coverage for $375 for 15 months. Our deductible is $45 per claim plus service call fees. It’s definitely more affordable for us to cover home repairs this way since we are still paying off debts.
Mrs Crackin the Whip It was a brutal home-owner hazing for sure!
I honestly wouldn’t regret not purchasing the home warranty. We had one when we bought our first house (still current house) over 3 years ago, and about a week in we had stuff start breaking, and of course none of it was covered under the warranty. So sneaky! These are awesome tips though, home ownership is really such a great lesson in preparing for the unexpected!
Christina@EmbracingSimple There was a year left on a “warranty” with the house we bought, but like yours, it was pretty much useless. The warranty we just recently got for the house is good for appliance repair and replacement, as well as plumbing and electrical issues. It’s definitely important to read the fine print to know what the company is liable for covering whenever you buy into a warranty.
So true. My co-workers bought a house a year ago and it has been a money pit. My wife and I bought a co-op since houses are too expensive in the NYC metro area. There are negatives to co-ops but one of the pros is that most repairs are taken care of by maintenance. However some things have come up which we did have to pay out of pocket but they were manageable. We’re thinking about doing some minor renovations, but nothing extravagant. Mainly converting a space to a room for our son.
I received a home warranty as part of my purchase and closing and I’m so glad I had it that first year. It gave me time to really beef up my emergency savings.
At times home ownership can seem like never ending projects. We typically budget all of our pending projects individually and then prioritize them in a list. We tackle the most necessary projects first or the ones that will have the greatest return down the road.
These are all great points to think about. I have not purchased a home yet but I’m planning on it in the future and what scares me the most is not getting approved or the mortgage, but the unexpected expenses.
Andrew LivingRichCheaply That’s fascinating, Andrew. I don’t have any experience with co-ops. That’s something I will definitely need to look into.
SimplySave Warranties really can be helpful. I’m glad yours worked out well for you in your first year!
Financial Tour Guide Never-ending is probably the best description for home projects. Once one thing is fixed another thing pops up to take its place on the to-do list. It’s definitely a great idea to prioritize your to-do list by budget and necessity.
Chonce Unexpected expenses aren’t fun to deal with or pay for, but if you go into homeownership prepared for those expenses with an emergency fund and/or a warranty, then you won’t have anything to worry (too much) about.