A down payment might be the biggest upfront cost of buying a home, but there are other things you'll need cash for

A down payment might be the biggest upfront cost of buying a home, but there are other things you'll need cash for
You might as well go into homeownership as financially prepared as possible.Cavan Images/Getty
  • Planning for both expected and unexpected costs can make the transition to first-time homeownership smoother.
  • In addition to the down payment, you might also need furniture, yard equipment, or cash for immediate repairs or renovations.
  • Beyond the upfront costs, you'll probably spend between 1% and 4% of your home's value on maintenance each year.
  • Shoring up a cash emergency fund before you move in is a smart way to build a buffer into your budget.

First-time homeownership has been a bright spot for many Americans in an otherwise dismal year.

With mortgage rates at all-time lows and people seeking more space for amenities like home offices, gyms, and backyards, the homebuying surge is expected to continue into 2021, the National Association of Realtors reports.

If you're in the market to buy your first house, there's no such thing as overplanning - especially when it comes to budgeting for both expected and unexpected costs.
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No one has to buy a house, so you might as well go into it as financially prepared as possible.

Planned costs include more than the down payment

It's not uncommon to spend years saving for a down payment, but many people overlook less obvious expenses they'll need cash for as a new homeowner.

There are of course closing costs associated with the purchase itself. There may also be recurring charges for property taxes, mortgage insurance, homeowners insurance, and homeowners association fees. But it doesn't end there, said Eric Roberge, a certified financial planner and founder of Beyond Your Hammock.
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Anyone moving from an apartment to a single-family home, as Roberge and his wife recently did, will likely be blessed with more space. More space means more furniture and decor to fill it. In other words, you can expect to buy those items that turn a house into a home.

You'll likely also need maintenance equipment - think everything from hammers and screw drivers to a lawnmower or snowblower, Roberge said. There might be immediate repairs or renovations to make shortly after you move in, and those should be budgeted for as well. "This is completely dependent on what you're buying, but if you know a major system is on the fritz (i.e. the water heater is 20 years old), then you should be able to plan for a replacement in the near future," Roberge said.
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Save up to 4% of the home's value to use as an emergency fund

If something in your home breaks as a renter, you generally don't have to foot the bill. It's different for a homeowner. Everything from ceiling leaks to a burned-out lightbulb to termite infestation is within their jurisdiction - and it begins the second the keys are handed over.

Roberge said a typical homeowner could spend anywhere from 1% to 4% of their home's value on maintenance in an average year.

"For your first year of homeownership, I would estimate on the high end of that range and assume you'll need to spend at least 4 to 5% on everything from regular repairs to random expenses that you simply forgot to factor into a specific savings plan," he said. Consider this your home emergency fund: a pot of cash that sits in a high-yield savings account where it's easily accessible and growing at a modest rate.
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Using that guideline, a house worth $500,000 would require an emergency fund of at least $5,000. If you can, shore up this money before your purchase. It might seem overwhelming to tack on a few thousands dollars to your initial savings goal, but unforeseen issues could crop up as soon as your first week of homeownership, and you don't want to put them off (or rely on high-interest credit to pick up the slack).

"It's like a medical issue. If you have a toothache and don't do anything about it, the problem is only going to get worse," Kathleen Boyd, a certified financial planner in Long Beach, California, previously told Business Insider.

Be ready to make some trade-offs

Roberge said it's important for homeowners who don't have an unlimited supply of cash (that's most of us) to distinguish between wants and needs. You might want to purchase a new play set to occupy the kids in the backyard, but you need to fix the plumbing before a real catastrophe occurs.
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Set up a "clear order of operations," Roberge said, to direct where your available money goes first. You might not be able to afford everything you want, he added, but you'll be prepared to afford any real expense that comes up.

When Roberge and his wife moved from a small city apartment to a large country house during the pandemic, they had to make some choices.

"It would be nice to spend money to fill the new house with furniture and decor," he said. "But we also live in a more rural area where power outages aren't uncommon ... so we're prioritizing a generator this year. We need a backup source of power in the winter - we can live with bare walls and some empty rooms for a little while."
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