Congratulations on buying your first home! As one of the biggest financial decisions in life, buying a home can completely change someone’s financial situation. While new homeowners should do all they can before buying a house to understand how their finances may change, the reality may be different from the expectation. To help keep finances in order, first-time homeowners need to make some financial decisions to update their monthly spending habits, make upgrades to their new homes, and protect their beneficiaries. All of that can feel a bit overwhelming, but following these 6 tips can help make those decisions much easier.
Update Your BudgetConsider the new expenses of homeownership and how that impacts your budget
Up to this point, a budget may have been made to prioritize saving up to buy a house. After buying a house, new homeowners can expect their financial obligations to change. That’s why it’s crucial that first-time homeowners reevaluate and adjust their budgets. After buying a house, new homeowners should consider the following and how each will impact their budget:
Maintenance and repair costs
To get started, first consider normal spending habits. Start to categorize those into essential and non-essential categories to get a better picture of where your money is going. List out fixed and variable expenses. After determining how much of your monthly income is needed to cover those expenses, you can then tell how much you can start saving for other expenses, like home maintenance repairs, or where you may have to cut spending to be able to better afford your new financial obligations. With any excess income, make a plan of how to devote it towards paying down other large debts or saving for retirement. Try to stick to your budget and reevaluate it regularly so that you can anticipate any changes.
Evaluate Your Emergency FundSave money for emergency maintenance on your new house
Everyone should have an emergency fund for unexpected costs, like medical issues. It may be tempting to use that emergency fund for your new home, but you should ultimately have a separate emergency fund set aside for unplanned home maintenance.
In general, it’s a good idea to save between 1-4% of the purchase price of the home for preventative maintenance and repairs. Older homes generally require much more maintenance, so new homeowners with a home over 25 years old may want to consider saving on the higher side at around 4%.
You will also want to consider what constitutes an emergency for your home emergency fund. Taking money out of your emergency home fund for regular maintenance can deplete your fund. In instances where you may need to replace a furnace in the winter or a hot water heater, you will want to have enough money set aside so that you can afford your regular bills while being able to afford the emergency maintenance on your home.
Consider Life Insurance PoliciesGet a life insurance policy to financially protect your beneficiaries
Life insurance may not be the top financial priority of a new homeowner, however, it is a smart financial move. One thing a new homeowner has to consider is who will hold the financial responsibility of the new home if they pass away.
Families who have just purchased a house usually consider multiple sources of income when considering how much home they can afford. If one spouse were to pass away unexpectedly, the responsibility would fall onto the other spouse. As they adjust to a single source of income, a mortgage that was once manageable can turn into a financial nightmare. No matter who the financial obligation lands upon, the payout of a life insurance policy can help beneficiaries keep up with mortgage payments among other financial obligations, such as paying off other large debts and financing a funeral.
When it comes time to find life insurance, there are quite a few different options to consider. While the cost and coverage depend on someone’s age, health, and financial needs, many new homeowners find that traditional or accelerated term life insurance or permanent life insurance policies are their best options.
Accelerated Term Life Insurance
Accelerated term life insurance is a type of insurance without a medical exam. While more traditional policies require a medical exam to determine the risk of a policyholder, an accelerated term life insurance policy instead asks applicants to provide details about their health, finances, and lifestyle. Using that information from the application, insurance carriers use an accelerated underwriting process using algorithms to either approve or deny an applicant almost immediately after applying.
While this type of life insurance is not offered by every provider, it is becoming a much more popular option. The application process tends to be much easier and approval times are much quicker than that of traditional life insurance policies. Plus, the coverage someone can get is comparable to more traditional policies.
While an accelerated term life insurance policy is a great option for those who want to get a life insurance policy quickly or bypass a normally required medical exam, not everyone will be approved for this type of life insurance. People with serious medical conditions or lifestyle habits, like smoking, may be rejected for this type of insurance. There are other types of life insurance policies that do not require a medical exam, like simplified or guaranteed life insurance, which can be considered if someone needs life insurance but isn’t in great health.
Traditional Term Life Insurance
Traditional term life insurance and accelerated term life insurance are essentially the same types of insurance policy, but the application and underwriting processes are different. Whereas the accelerated option does not require a medical exam, traditional term life insurance policies may require the applicant to undergo a medical exam. During a medical exam, an applicant can expect to be asked quite a few questions about their medical history, blood and urine samples to be taken, and undergo a brief physical exam. During the underwriting process, the results of the medical exam in combination with information about lifestyle choices and family health history will be taken into consideration to determine the premium and coverage amount.
Term life insurance policies last for a specific, predetermined term, which can range from 10 years to 30 years. During that term, if the policyholder were to pass away, the insurance provider would pay out the death benefit to the policyholder’s beneficiary. Because this type of insurance is only valid for a certain period rather than throughout someone’s entire life, the premium payment is typically much more affordable than that of a permanent life insurance policy. This type of life insurance is great for someone who is young, in good health, and needs a more affordable monthly premium rate.
Permanent Life Insurance
While a term life insurance policy only covers a policyholder for a certain time, a permanent life insurance policy covers someone for their entire life. The two most common types of permanent life insurance are whole life and universal life insurance. Much like a traditional term life insurance policy, permanent life insurance policies typically require a medical exam to determine coverage and premiums.
As a policyholder pays their monthly premium for a permanent life insurance policy, that premium not only keeps the death benefit active but also accumulates a cash value on the policy. Later down the road, policyholders can borrow money against the insurance policy or even take funds out to pay for large expenses. Because of this added value and the fact that a policy covers someone for their entire life, permanent life insurance policies tend to be much more expensive than other policy types. This type of insurance is great for someone who can afford a high premium payment for coverage for an extended time.
Set Goals For Upgrading Your HomePrepare for home upgrades to understand your timeline for renovations
Most first-time homeowners buy a home expecting to make quite a few renovations. While of course, it would be ideal to do all of the renovations at once, that’s often not a possibility. Budgeting for remodels and renovations will help you determine what you can afford and the timeline of how long it will take to accomplish everything you want and need to be done.
The first step you will need to take here will be to list out everything you want to renovate or update in your house. It may be a good idea to rank the importance of these improvements to help you prioritize what needs to be done first and what can be taken care of later. Getting a rough idea of what the cost of each project will cost can help here, too. With a better idea of your renovation projects, determine how much you can afford to spend. You may take out a loan or opt to save up for each project. If you do decide to take a loan, figure out how much you can borrow and how much you will have to pay monthly to repay the loan. Should you decide to save up, determine how much you want to set aside monthly and get a better idea of when you can take on the project.
When it comes time to make your renovations and updates to your home, you will want to get a few different quotes from contractors or determine if the project is something you can take on yourself to save some money. To cut down the costs to turn your dream updates into a reality, you may want to consider finding low-cost alternatives to your materials, taking smaller steps to accomplish the project, or
Estimate Property TaxesEstimate your property taxes to prepare for tax collection ahead of time
Something that can take first-time homeowners by surprise is property taxes. You will have to pay a certain percentage of your home’s property value in taxes, which go to local governments to fund schools, road maintenance, and other public services. After you close on your home, you likely had to put your first year of property taxes into escrow. So, when should you expect to start paying property taxes regularly?
Generally speaking, property taxes are collected twice per year. Those payments are normally due on March 1 and September 1 and both cover the months in between each payment due date. To get a better idea of how much to expect to pay for property taxes, you can use a tax calculator to get an estimation so you can prepare for the payment before the due date. While how much you pay changes depending on the location and the value of the property, don’t let property taxes catch you by surprise.
Review Your Retirement PlanDon’t forget about your other financial goals, like retirement
With a new house and a million renovation projects in mind, it can be easy to lose sight of other financial goals, like retirement planning. Among these financial responsibilities, you must find a way to incorporate retirement into your savings plan.
As you adjust your budget and prioritize your renovation goals, take a look at what you currently have set aside for retirement. Consider the age at which you would like to retire and consider how much you may need to do so. If your employer has a 401(k) option, check what you are contributing. If you cannot afford what you are currently investing or find room in your budget to invest more, update your contribution amount. If you don’t have access to retirement options through work, consider options like a Roth IRA. At the very least, you should be contributing to your retirement fund monthly to save enough money to support your retirement goals.
Becoming a new homeowner is an exciting and overwhelming process. With so many financial changes, new homeowners will want to do everything in their power to make the smartest financial decisions so that these changes are much more manageable. From protecting beneficiaries with a life insurance policy to budgeting updates to your home, keeping these financial tips at the top of your mind can help you understand how to make better financial decisions after buying your first home. x