To manage your biggest asset, create a financial plan that covers repairs, upgrades, mortgages, insurance, and taxes.
Do you pay each home-related expense as it comes? If so, you’re missing opportunities for upgrades, or much worse, heading into a financial crisis when a slew of surprise maintenance items hit. So take a holistic look at what it costs to operate your house and set up a home financial plan.
Use this home financial plan budget worksheet, and start by writing a list of expenses, such as:
Home insurance, including liability
Repairs and maintenance, such as new furnace, roof, painting
Voluntary upgrades, such as a swimming pool, a premium range, a new powder room
The Mortgage: Pay It — and Then Some
Yup, you already shell out a lot for your mortgage, but can you pay more? Even a little extra each month can add up to an earlier payoff. Let’s say you have $200,000 in outstanding principal and a 20-year fixed-rate mortgage at 5%. Your monthly payment is $1,319.91. But if you can manage to pay another $100 a month, you’ll save $14,887 in interest.
Insurance: Protect Your Property
Your vegetable garden is pointless without a fence to keep out rabbits; likewise, your home financial plan will come to nothing without an insurance “fence”:
Homeowner’s insurance. Basic coverage for your home and everything in it. The average cost is $636 per year but this varies widely by state.
Liability coverage. Protects you from a lawsuit if someone gets hurt on your property, for example. Your best bet: An umbrella policy. For about $300 a year you can buy a typical $1 million policy.
Various disaster insurance policies. Optional policies cover flood, earthquake, and hurricane damage. As part of your home financial plan, you have to research to see what disaster coverage, if any, you need in your area, and what your standard policy already covers. For $540 a year you can buy flood insurance, for example.
Repairs and Renovations: By Choice or Necessity
You own a home, so you’ll be spending money on everything from a new faucet to — surprise! — a new roof. Freddie Mac and other authorities say as part of your home financial plan, you should be prepared to spend 1% to 3% of the market value of the home annually on maintenance. To be extra-prudent, open a savings account and make regular payments until your account reaches 1% to 3% of your home’s current value.
To help you budget: Start with the inspection report you received when you bought the house. Did the inspector indicate that you would need a new roof in five years? A new furnace in 10? Keep a log of your major appliances’ age so you can estimate when they’ll need replacing. Some estimated life spans:
Roof: 20-25 years
Heating systems: 15-20 years
Range/ovens: 11-15 years
Water heaters: 8-13 years
Then get estimates on what replacements will cost and start saving.
Taxes: (Almost) No Way Around Them
Even if your lender handles your property taxes from an escrow account, you need to budget for them in your home financial plan. They creep up almost every year, it seems. Take responsibility for tracking the changes in your area: Look over past tax bills to get a sense of how quickly they’ve risen in the past. You can generally deduct property taxes on your federal return. A tax pro can tell you how much of a tax break you’ll get, to help you fine-tune your home financial plan. You may be able to reduce your tax burden by getting a reassessment. Do your homework first: Are comparable houses taxed less than yours? Ask the local assessor what formula is used to set tax rates. You can challenge the assessed value and get yourself a rollback.