The First Year

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Owning a home entails ongoing expenses that extend beyond the initial purchase.  The initial year of homeownership can present various financial challenges. However, by implementing a well-structured financial plan, you can confidently navigate this period and effectively manage your expenses. It is crucial to avoid relying on credit as a short-term solution, as it can lead to additional costs and make it harder to meet your financial obligations in the future. By creating a comprehensive financial plan and adhering to it, you can ensure that you successfully tackle all the new expenses associated with homeownership and establish a solid foundation for long-term financial stability.  In this chapter, we will provide insights into what you can expect during your first year of homeownership, offering guidance to help you effectively manage your finances. 

Preparing financially for year one 

Transitioning into homeownership significantly impacts your financial situation. While your mortgage payment may or may not surpass your current rent, there are additional financial responsibilities to consider. These include homeowners insurance, property taxes, regular maintenance, and potential costs like homeowners association dues if you are purchasing a condo or townhouse. Moreover, it's important to account for potential increases in utility expenses if your new home is larger than your current residence. In addition to these recurring costs, you may also encounter one-time expenses associated with establishing your new residence, such as moving costs, utility deposits, and furnishings. It's worth noting that in many communities, new homeowners may be subject to a supplemental tax bill. 

As ownership triggers a change in your home's tax value, there may be a delay in the adjustment as the assessor's office calculates the new value and corresponding taxes. Consequently, you may be required to pay the difference between what you previously paid based on the old value and the amount you should have paid based on the new value. By proactively preparing your finances and accounting for these various expenses, you can confidently navigate the first year of homeownership, ensuring a smooth and successful transition without relying on credit or facing unforeseen financial challenges. 

Adjust for Tax Benefits
There are significant tax advantages to homeownership. Mortgage interest and property taxes are tax deductible, which increases your net income and offsets some of the cost of the mortgage payment.

The following example illustrates the estimated annual deduction for a $150,000 home and a $350,000 home.

1. Home Value: .......................................................$150k        |   $350k

2. Estimated monthly interest and taxes: .........$850          |   $2,325

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3. Annual Deductions (bullet 2 x 12 months):...$10,200  |   $27,900

If your adjusted gross income was $80,000 last year, and you bought the $350,000 home, your adjusted gross income this year will be $52,100:

$80,000 adjusted gross income

- $27,900 mortgage deduction

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$52,100 new adjusted gross income

Maximizing Tax Benefits: Refunds and Deductions 

When it comes to tax refunds, you have a choice. You can either receive a lump sum refund at the end of the year or adjust the number of standard exemptions to have fewer taxes withheld, effectively increasing your take-home pay each month. Both options result in the same net effect – you're simply choosing to utilize your tax refund on a monthly basis. While your mortgage payment may be higher than your rent, owning a home can offer tax advantages. 

By itemizing your deductions on your federal income tax return, you can typically deduct certain home-related expenses, such as mortgage interest (including points) and property taxes. The more deductions you can claim, the lower your overall tax liability. Given that your tax situation may become more complex due to your recent home purchase, it may be wise to consider hiring a tax professional or investing in tax preparation software to assist you with filing your return. However, it is also possible to navigate the process on your own with a bit of research, as all tax regulations are readily available on the IRS website.