There are many different reasons why people invest in homes. For some, buying a home essentially is an investment—it is primarily a financial decision. For others, purchasing a home serves a different purpose altogether; it is a decision made for psychological reasons.
Whether you plan to buy a house and turn around and resell it or you want to live in it for the rest of your life and pass it down to your children, owning a home is more expensive than you may realize. Here are 5 common budgeting errors and oversights made by new homeowners.
1. Choosing to look at your primary residence as part of your real estate portfolio.
A lot of people choose to look at their primary residence as a part of their real estate portfolio. There is a mix of pros and cons for doing this, and there are differing schools of thought.
So why do we feel it is a mistake? Well, first of all, you probably will be putting roughly a third of your income toward your mortgage payments. On top of that, you will likely have a 20% down payment. But that means that if you count your primary residence as part of your portfolio, it is going to devour most of the space in that portfolio. This makes it hard to diversify.
On top of that, what if you want to rebalance your portfolio, as is inevitable over time? You can shift a lot of assets around, but only the more liquid ones. A house is anything but liquid. You would need to sell it even to get a proper valuation. And you may not have any interest in selling it anyway. You cannot just arbitrarily take some of the equity in it and move it elsewhere.
Additionally, the psychological value of your home isn’t something which you can easily assign a quantitative weight to. Many people who look at their primary residence primarily as an investment miss out on the joy of having an actual home. Wealthfront, a company we recommend (more on them in just a bit), has a great article on this topic here.
2. Choosing the wrong type of interest rate.
Another common budgeting mistake which homebuyers make is selecting the wrong type of interest rate given their situation. So instead of choosing a fixed rate when they ought to, they choose an adjustable rate, or vice versa.
How do you figure out which type of interest rate makes sense given your circumstances? It helps to ask yourself how long you plan to stay in the home. If you will be there only temporarily, an adjustable interest rate which is very low for the first few years may be a great option. But if you plan to stay in the home over a very long time period, you may want to avoid that kind of unpredictability and choose a safer fixed interest rate. Otherwise you could find yourself in a predicament where your rates are ballooning out of control at some point down the road. This happened to tons of people during the recession.
3. Forgetting the numerous other monthly costs associated with owning a home.
It is easy to think that after your down payment, you will have nothing to worry about each month with regard to home-related expenses other than your mortgage. But this is far from being the case. You will have many other housing-related costs to shoulder, including:
• Interest on your mortgage
• Property taxes
• Homeowner’s insurance
• Additional hazard insurance
• Homeowner’s association fees (and other related fees)
• Utilities (water, power, trash, etc.)
• Maintenance costs
• Repair costs
• Furnishings, etc.
All of these costs can add up very quickly, and many new homeowners are unprepared for them. Some of them will exist even long after the entire mortgage is paid off, like utilities and property taxes.
Yes, before you ask, there are some tax deductions which can save you money as a homeowner. But those deductions will barely dent the interest you pay on the mortgage, let alone make up for the other costs of home ownership.
4. Failing to keep a monthly budget which incorporates all expenses.
Do you have a monthly budget which accounts not just for your home-related expenses, but all of the costs of living? If not, you need one. Freddie Mac offers a monthly budget worksheet.
5. Not defining a plan for long-term savings goals.
Finally, you also need to make sure that you have a plan for your long-term financial future. It is easy to get lost in the dream of owning a home and forget that you have other goals and dreams you need to reach for as well.
If you are feeling overwhelmed trying to plan your financial future, we recommend using a robo-advisor like Wealthfront or Betterment. Read a comparison of Betterment vs. Wealthfront
There are many financial pitfalls you can easily stumble into if you are not careful planning your expenses as a new homeowner, but with a robo-advisor on your side and some extra thought and planning, you can pave the way to a bright future in your new home!