This post was created in partnership with the National Association of Realtors.
Thinking of draining your bank account to buy a home? There are more expenses likely to arise after purchasing a home. A recent report by Home Advisor shows that homeowners spend an average of $10,182 per year on repairs and maintenance. That number includes both minor repairs like replacing a shower head; and major repairs like the average cost of $7,000 to replace a roof. Unless you purchase a brand new home, repairs are highly likely and they have an expected timeline. For example, according to Energy.gov, storage water heaters only last 10-15 years and a central air unit lasts about 15-20 years. However, even if you purchase a new home, a regular maintenance schedule can help delay larger repairs.
Unexpected and Expected Expenses
With this in mind, within the first few months of moving in, it is possible that you will have to spend on expected or unexpected repairs or maintenance. Therefore, it is important to have funds in your bank account to cover these expenses.
No emergency funds? Some states have programs that provide grants for emergency repair. For example, the Tennessee Housing Development Agency has an Emergency Repair Program. However, in order to qualify, the homeowner must be older than the age of 60 or disabled. So a program like this may not be a fit for you.
Another option, if you don’t have funds on hand is to use your credit cards.
However, using unsecured debt, like a credit card, to cover repairs for a property linked to secured debt, a mortgage, is not advisable. This is primarily because credit cards often come with higher interest rates than a home equity line of credit,
A home equity line of credit (HELOC) is another option, but it is additional debt that can take months to pay off.
You should not only expect these home repair and regular maintenance expenses, but plan for them as well. That means setting aside a home repair savings fund.
A Bank Account Strategy to Cover Expected Expenses
Instead of draining your bank account to purchase a home, create a strategy to cover the mortgage as well as those expected repairs and maintenance.
When purchasing a new home, a good rule of thumb is to put aside around 4% of the purchase price set aside as a home repair fund.
For a mortgage of $100,000, that would equal $4,000 in the bank.
If you purchase a newer home, those funds can be earmarked for regular maintenance.
If you plan to purchase a home that is a bit older, ask about the expected life span for the roof, a/c unit, and the water heater. These are 3 of the costliest repairs.
Then, take the expected cost to replace each and divide that number by the number of years of useful life remaining.
For example, a roof with 4 years of expected life remaining divided into the average cost of $7,000 would mean an annual savings of $1,750. Divided by 12 months in the year, that would equal a set aside of $145.83 per month.
How Much Home Can I Really Afford?
In order to buy a home without draining your bank account, it is important to factor in not only the purchase price of the home, but also consider the those expenses that come with owning a property.
Start with your monthly expenses and debt. Then look at your income so you can calculate your debt to income (DTI) ratio.
Lenders typically look for a DTI under 43%. To calculate this number, add all of your bills including utilities, debt payments, and current rent, etc. Then, to factor in your expected home expenses, add 4% of the expected home price to your current monthly expenses and divide that number by your monthly gross income.
Here’s an example.
Monthly expenses = $3,500
4% of 150,000 home = $500 per month
Total monthly expenses = $4,000
If your monthly gross income is 120,000
Take 120,000 * 43% = 51,600
Then, divided by 12 months = $4,300 per month
If your monthly gross income is 100,000
Take 100,000 * 43% = 43,000
Then, divided by 12 months = $3,583 per month
To purchase a home worth $150,000 and still have a home maintenance and repair fund, your total monthly expenses including your mortgage should not exceed $4,000.
In the second example, a home of $150,000 could potentially cause financial stress.
Think ahead to factor in expected home repairs and expenses before purchasing your home. While you may think that you can avoid setting funds aside when purchasing a new home, there is still suggested maintenance that would require funds.
And if you purchase an older home, determine what repairs or expenses are likely to occur. Either way, a good rule of thumb is to put aside 4% of the home’s value in case of emergencies or expected repairs.