How to Create a First-Time Homeowners' Budget

A well-planned first-time homeowners' budget will meet two important financial goals. The first is to become financially able to buy the home. The second is to remain financially able to keep it.

Perhaps you already have your down payment and are ready to take the next step. Or maybe you want to work out how much you need to save before you start to look for a place of your own. A well-planned first-time home buyer budget can help you stay on a path to long-term success.

There are two types of costs involved in buying a home: Upfront payments and ongoing ones. Let's break them down.

Upfront costs to buy a home

The most obvious cost you'll deal with is the price of the home itself. Few people can afford to buy real estate without taking out a mortgage. Here are the upfront costs you'll need to cover.

• Down payment: Most people put at least 3% down, although it is possible to get a zero down payment mortgage. You can learn about different types of mortgages in our beginner's guide to home loans.
• Closing costs: Depending on the lender and the home loan program, there's a number of fees you may need to pay. Some lenders allow you to roll closing costs into the loan balance. If you do, you'll pay less out of pocket. But you'll pay more in interest charges for the life of the loan. The best lenders for first-time home buyers will walk you through expected costs so you won't be surprised at closing time.

Besides the mortgage, you'll also pay the usual expenses associated with any relocation.

• Moving costs: You might need to rent a moving truck and shell out cash to get your utilities turned on.
• Making it yours: You're unlikely to buy a home that exactly suits your tastes. You might want to paint, install new window coverings, clean up the house, buy furniture, or even take on a major remodel.

For most of us, a home is the largest purchase we'll ever make. That's why it makes sense to understand all the costs ahead of time and work out how they'll fit into your budget, whether you're browsing starter homes in the suburbs or townhouses in a bustling downtown area.

Ongoing costs

Your monthly mortgage payment will depend on the amount you borrow, the mortgage rates you qualify for, and the type of property you buy. Use a mortgage calculator to get an idea of what your costs might look like.

Mortgage lenders sometimes call the key components of your monthly payment PITI or PITIA. It includes:

• Mortgage Principal plus Interest payment: Your credit score and the amount you borrow both influence the interest rate you qualify for. If you are able to increase your credit score before you apply, you could lower your mortgage payment.
• Property Taxes: The national average is about 1%, of the appraised value, but yours could be higher or lower than that.
• Homeowners Insurance: Expect to pay at least $100 to 150 per month.
• Homeowners Association fees: These vary wildly depending on where you live.

If you make a down payment of less than 20%, you'll likely have to pay a mortgage insurance premium (sometimes called PMI or private mortgage insurance). There are additional expenses you'll have to factor in as a homeowner, which we'll cover below.

From utilities to building maintenance, there are several expenses homeowners should prepare for. Here are some of the most common costs.

• Utilities: Utilities include water, gas, electric, sewer, garbage collection, and recycling collection. These items may be paid separately to the individual providers, or appear as line items on your property tax bill. If you buy in a homeowners association, utilities for the shared areas will be covered by your HOA fees.
• Internet, phone, cable TV: You might be lucky enough to have a landlord who pays for these non-essential utilities. But most homeowners have to foot these bills 100%.
• Landscaping: Maintaining a beautiful outdoor space can be time consuming and difficult. If you're a busy professional (or you just have a brown thumb), consider paying someone to mow the lawn and pull weeds for you.
• Building maintenance: The longevity of your home will depend on its age and type of construction. Nothing lasts forever. An asphalt roof lasts about 20 years; a ceramic tile roof lasts about 50. Water heaters eventually fail. You'll be financially responsible for everything from the foundation to the roof on a single-family home and most townhouses.

Here are the steps to create a first-time homeowner budget.

1. Start with the monthly housing expense you're comfortable with. If you currently pay rent, consider using that as your starting point.
2. Make a list of your expected expenses, starting with the expenses you already pay. For example, internet, transportation, and any debt payments.
3. Add the expenses you will start paying once you have a home of your own.
4. Make sure you include regular contributions to your emergency fund and your retirement savings. Ideally, your emergency fund should be big enough to cover three to six months' worth of living expenses. This will ensure you can continue to pay the mortgage if you lose your job or face another financial issue. You can use our emergency fund calculator to see how much you might expect to save.
5. Set aside approximately 1% of the home's purchase price each year for maintenance.

That last item may be the biggest new (and ongoing) expense you'll face. There is no way to predict exactly how much money you'll spend or when. But many people ballpark annual maintenance at 1% of the purchase price. Maintenance is not an "if," but a "when." You might have no expenses for a period of time, and then several large expenses all at once. You can be certain things will need to be replaced or repaired in your home sooner or later.

Once you've got these items covered, you may also want to set a new savings goal for future remodels or upgrades. Depending on your total monthly spending, you may find you need to wait a while before you can update the kitchen or bathroom.

Here's a recap of the necessary budget line items. You may have other expenses to add.

• Your monthly housing payment (PITIA)
• Groceries
• Transportation
• Insurance (auto, health, life)
• Debt payments, if applicable
• Cell phone
• Internet
• Gas and electricity
• Landscape maintenance
• Water and other utilities
• Emergency savings
• Retirement
• Building maintenance
• Future remodel or upgrade

A first-time home-buyer class can also walk you through some of the important categories to include in budgeting for a home.

The money you set aside to buy a home should be in a place you can access on demand without penalty. A high-yield savings account or a money market account (MMA) both give you full access to your funds, so long as you don't make more than six withdrawals per month. You can earn significantly more interest than you'd get from a typical checking or savings account.

A certificate of deposit (CD) is another option for your down payment savings. The interest rates are comparable to those of MMAs and high-yield savings accounts. But keep in mind that you'll pay a penalty if you withdraw the money before the CD matures.

It can be tempting to invest your home-of-your-own savings in the stock market to try to earn more interest. However, the stock market is only a good option for money you don't need in the short term -- you don't want to have to sell when the market is down. Stocks can be volatile and there are no guarantees.

It takes many people a couple of years or more to save toward the down payment on a house and build up a sizable emergency fund. During that time, it's smart to maximize earnings and minimize risk.

Still have questions?

Here are some other questions we've answered:

• How to Buy a House
• First-Time Home Buyers Guide
• 9 First-Time Home Buyer Mistakes to Avoid