You may need to save even more to avoid financial problems in the event of surprise issues at home.
You’ve reconciled your income with how much of a mortgage you can afford, set aside enough money for a down payment you feel comfortable with and calculated everything you’ll need to pay for closing costs and movers. You’re ready to buy a home at last. But before you do, consider adding even more to that mountain of money you’ll need before closing. All homebuyers should have additional savings set aside for home maintenance and repair emergencies, and they should continuously contribute to the fund.
Set aside 1 percent of the value of the home on an annual basis
At the end of January, the median price of homes listed in Colorado Springs $285,000. If your home is similarly valued and you follow the 1 percent rule, you’ll want to save a little over $2,800 every year.
Buying a home that is significantly more or less will affect the amount you need to save. For example, buying a $1 million house means you should save an extra $10,000 per year to ensure you won’t be financially strapped in the event of a major system failure at home.
Depending on the type and condition of the home, you may need to have an even larger percentage of the price of your home on hand. A house that’s older or has more deferred maintenance will likely require more savings to account for the greater possibility that the furnace, roof or plumbing will need work – possibly at the same time.
Knowing you need to keep an extra stack of cash in the bank and having it are, of course, two different things. Here are three tips to help you build that additional savings before you buy your home, and how to use the money wisely after the purchase is complete.'
Practice saving more. First-time homebuyer boot camps and housing counselors often instruct clients to adjust their monthly finances like they've already purchased a house to get a feel for the difference between rent and combination of bills, mortgage and potential savings to avoid a financial shock. If your rent is less than the total amount you’ll be paying for your mortgage, utilities and maintenance savings, start putting that additional amount away now.
Know what you’re walking into. If you pay close enough attention, you shouldn’t come across too many maintenance surprises in your first year of homeownership.
The home inspection during the due diligence period of your home purchase should be able to tell you what systems are likely to fail first. While the inspection may note that the roof is currently in OK condition, for example, the report may also note that at 28 years old, it will likely need replacement in the next two years. With this information, you know you’ll need more than a rainy-day fund of $2,800. A new roof installation costs $7,271 on average.
When you’re able to plan for what systems will need replacement and when, you also have the opportunity to research materials, contractors and make a decision that works for your budget in the long run.
More often than not, a furnace will break down on a particularly cold weekend, and an unprepared buyer will resort to hiring the company that can come out the fastest and install the cheapest heating replacement in the shortest amount of time.
Have a game plan. There’s almost always something that could be repaired, improved or updated in a home, and it’s good to operate with a to-do list rather than rushing for emergency repairs when everything fails.
Then when a real emergency happens that you couldn’t have prevented, like a burst pipe during a deep freeze, you know you can delay that dishwasher replacement to ensure you have extra funds to cover the deductible on your homeowners insurance claim to make the repairs.
To reduce the number of annual surprises regular maintenance on major systems is necessary, particularly for your heating and cooling system.
As the homeowner, you can also reduce the number of emergencies by doing seasonal maintenance around the interior and exterior of a house, like cleaning out the gutters, clearing the dryer vents and changing furnace filters. With regular maintenance, that home maintenance emergency fund will be able to grow organically, and you won’t feel the same impact on your savings when a disaster occurs.