Your home is a big part of your total net worth. Home related expenses are between 35 to 45% of your monthly income. You will likely buy and sell 4 to 5 houses in your lifetime. Knowing that the home is a huge part of your financial situation, where is all the money in your house going? And what are you doing to manage it? Let’s take a look at the five specific categories of house financials.
Your home is your largest asset
Your home is a real estate asset that goes up and down in value based on a lot of factors like economic, neighborhood, and market. Tracking your home’s purchase price and the percent increase or decrease based on a current estimated value is important to understand the overall value of your home. Therefore, get a three-year forecast of your home’s value to understand whether your home is appreciating or depreciating in value.
The value of your home is one side of understanding the equity of your home. The other side is your debt or mortgage to buy the home. The equity is tied to the home’s valuation less your mortgage amount owed. When you purchased your house, you signed a mortgage. Knowing how much interest on your loan you might save if you increased your monthly mortgage payment above the minimum payment is helpful. This increased payment could reduce the time to pay off your loan and increase the equity in your home.
Your net worth with regards to your home is taking the estimated value of the home minus the remaining balance on your mortgage. As you continue to pay down your mortgage, your home equity will grow. As a result, having additional equity in your home is important if you need to take out a loan for other important events such as college tuition, medical expenses, or home improvements.
Knowing all your household expenses
Annual property expenses are usually the biggest percentage of home expenses. This usually includes your mortgage payment, property taxes, and home insurance policy. Other optional costs like homeowner association fees or mortgage insurance fees may also be included.
Utility expenses are another big component of your household expenses. Expenses like gas, electricity, water, sewer, and garbage collection. Additionally, other basic and premium expenses like internet, television, pest control, landscaping, pool, or cleaning services may be included.
Many of these household expenses are billed once a month. However, some bills might have a billing cycle of every other month, quarterly, or annually or semi-annually. It is important to have a monthly expense budget that helps manage cash flow for overall cash planning.
Preventative maintenance and repair costs are often an over looked expense. Mowing the lawn, changing the air filters, steam cleaning the carpets, and re-caulking the bathroom are all expenses that need to be managed. Additionally, fixing a garbage disposal or replacing a broken faucet is a forgotten budget item. Set aside an annual maintenance budget of 1 to 4% of the purchase price of your home for maintenance and repair expenses.
Home remodeling projects as additional investments
Major home remodel projects cost money to execute, however they also are additional investments into your home. To keep you in budget, it is important to plan and budget for remodeling expenses. Large projects like kitchen and bathrooms remodel costs vary depending on the choices you make in products and brands. The same applies to adding on to the house like new rooms, roofs, replacement windows, HVAC systems, and landscaping projects.
For tax purposes, it is important to track the tax basis in your house. The tax basis is the purchase price plus all large home remodel projects you have completed. This will be compared against your eventual selling price of your home. The tax basis of your home will determine what impact it has on your taxes. As a result, you may be able to use some remodeling projects as deductions. Be sure to consult your accountant or your state laws.
Hidden assets and expenses
All of your personal property adds up to a lot of money. Personal property like furniture, electronics, clothing, housewares, tools and sports equipment are the possessions that you own. Valuables like art, antiques, and other collections are often worth more to replace. Take a home inventory to determine the value of these assets. These assets ultimately become part of your estate plan. Also, make sure you compare the details of your home inventory with your home insurance policy coverage. By comparing your inventory with your insurance coverage, you will know whether you are properly insured. If you see a gap in your insurance coverage, use your home inventory to speak with your insurance agent to get updated coverage.
Selling and marketing expenses
Suddenly it is time to sell your house. You have some new life event or you are ready for a change. Whatever the case, moving requires buying and potentially selling a home. When you are ready to sell your home, it will be important to understand the fees required to sell your home. What is your listing price strategy given the condition of your home and the market conditions for your neighborhood? How can you differentiate your house from competing houses for sale and try to get a premium selling price for your asset?
A well-maintained home and efficient home that has been updated is a great recipe for maximizing the home’s value. Having a digital history of your asset and what you did to care for it is also helpful. But you also have sales commission costs and other closing costs to consider and calculate. Your cash at closing is the agreed upon sales price, minus the combined balances of home loans, minus commissions and closing costs.
With so many different ways to view the money in your home, it is important to have a system to stay on top of all the details. The combination of assets, expenses, investments, risk and changing marketing conditions regarding your house makes it imperative to manage. Your home is big part of your overall financial picture and net worth, so make sure you know where all the money for your house is going.
About Author: John Bodrozic is a co-founder of HomeZada, an online and mobile home management solution. HomeZada strives to educate and provide resources for homeowners in all areas of home management, including home inventory, home maintenance, home finances and home improvement projects.