How much money should you set aside for your home repairs? You'll need more than just the mortgage payment.
The Biggest Mistake
One of the biggest mistakes that new homeowners make is that they assume that the cost of their mortgage represents their entire household home-related budget.
After all, when they were renters, they didn’t have any home-related expenses other than the cost of rent. They make a direct one-to-one comparison between rent and mortgage and assume that the story ends there.
Unfortunately, it doesn’t.
The Never-Ending Repairs
If you don’t have any experience with this, this might sound like an incidental side note. But, as many homeowners can attest, this ends up taking a huge chunk out of your savings or can even require an additional loan.
That’s why people joke that a home is just a big pit that you pour all of your money into.
What types of repairs and maintenance are we talking about?
- Replacing the roof every 20 to 25 years
- Trimming the trees and the tree limbs
- Replacing the gutters
- Cleaning the gutters
- Installing an irrigation system in the lawn
- Fertilizing the lawn
- Planting sod
- Installing fences
- Tearing out fences
- Replacing vinyl windows every 35 years
- Replacing the siding
- Painting or rebuilding the deck
- Replacing all of the appliances
- Replacing the carpet every 8 to 10 years
You get the idea. The list could go on and on for a very long time.
Given that you don’t know what repairs your home is going to need, and you don’t know when your home will need those repairs, how can you budget for this amount?
Home Repair Budgets
We recommend setting aside 1% of the purchase price of your home to cover home expenses. For example, if your home cost $200,000, set aside $2,000 per year, or $166 per month, in a "future home repairs" savings account.
You won’t spend $2,000 every year. Some years you’ll be very lucky and spend next to zero. Other years, however, you’ll have to replace the roof, which will cost you $8,000.
Over the long-term, spending 1 percent of the purchase price of your home is a reasonable estimate.
Of course, there are some flaws with this assumption. After all, the purchase price of your home is based on a wide variety of factors. The neighborhood, the nearby schools, and any nearby parks all have an effect on the price of your house.
For example, your school district can improve dramatically and cause the home values in your area to rise. This will have no bearing on the amount of repairs or maintenance that your home will need.
Likewise, the part of the country where your house is located has a big effect on price. Two identical homes of identical quality, one in Southern California and the other in Kansas City, will have very different purchase prices. This is regardless of the fact that they have mostly the same maintenance and repair needs - and any differences in their repair needs will be based around weather and climate, rather than price.
In other words, the "1 percent of purchase price" assumption is an inherently flawed strategy. Unfortunately, it’s one of the best that we’ve got.
As a homeowner, you most likely don't know how much the previous homeowner spent on repairs and maintenance. If you had facts and data, you could make a more informed approximation.
In the absence of that data, however, the 1 percent rule of thumb will have to suffice.