You see the perfect home. It’s at the top of your price range. But you convince yourself you can stretch to make the payments. What could go wrong?
Well, quite a bit, as it turns out.
What many home buyers discover too late is that they’ve failed to take into account the hidden costs of owning a home. And the larger and more expensive the home, the higher the unexpected costs.
It’s not enough to budget for the monthly mortgage. You also need to factor in recurring expenses like real estate taxes, condo or homeowner’s association fees (those infamous HOA fees, which in some places run as high as a mortgage payment!), as well as homeowner’s insurance, which in Florida is among the highest in the nation due to our history of hurricanes.
And don’t forget those unexpected expenses – like fixing a pool leak, swapping out the air conditioning unit(s), replacing a roof, or repairing hurricane damage not covered by your policy – that often trip up first-time homeowners who haven’t budgeted for them.
Real estate company Zillow estimates that the average American homeowner pays about $9,500 annually in unexpected home expenses, but costs can run much higher for pricier properties.
Based on real-life experience, we advise clients to earmark 1-2% of their home’s market value each year to cover these budget-busters.
For example, if your home costs $250,000, you should expect to spend $2,500 to $5,000 each year on average for unexpected structural maintenance and repairs. Of course, you may not spend this amount every year, but big ticket items like replacing a water heater, renovating a bathroom, or fixing plumbing leaks can blow through several years worth of repairs in one fell swoop.
As an example, I live in an older home (in Florida terms, at least!) and last year had to shell out more than $3,500 each for two air conditioning units that conveniently died a few months apart.
That’s why when we sit down with clients to calculate how much house they can afford, we make sure to factor “the unexpected” into their budget so they don’t get in over their heads.
The Takeaway: One of the reason that financial planners advise clients to set up an “emergency fund” is to cover unexpected expenses like these. Without extra funds set aside, you’ll end up putting these costly repairs on a credit card. And if you can’t pay it off at the end of the month, you’re starting to dig yourself into a dangerous hole.