Financial Tips After Buying Your First Home

How do you protect your investment in your first home? Despite the relief of finally being there after all the work of finding and buying the property, the work of financial planning and budgeting does not stop once you collect the keys to your new home.

All of the work you have already done should help the process, of course. You had to determine how much home you can afford, pull together funds for a down payment, and apply for a home loan. This can be a painful and stressful process. According to a survey by FREEandCLEAR, 75% of home buyers likened the mortgage-acquisition process to visiting the dentist or undergoing a physical exam.

Read on to learn what you need to do next to keep the momentum going to secure this key stage in your financial life and build a firm foundation for your future.

Revisit Your Budget

Agent Elizabeth H. O'Neill of Warburg Realty in New York City said it can be daunting to think about establishing a homeowner-oriented financial plan after you've just gone through the buying process, but it's an essential step you can't afford to skip.

"Sitting down and working out a budget will pay dividends," O'Neill said, and your budget should thoroughly cover all the costs of owning a home. That includes your mortgage payment, as well as any increases in expenses associated with higher utility costs, homeowner's association or condo fees, and maintenance or repairs. The latter two are a significant consideration if you've recently made the transition from renting to owning. Having to fix a leaky toilet or replace a broken window out of pocket can come as a wake-up call if you've never owned a home before, O'Neill added.

The amount of money you can expect to spend on maintenance and upkeep could cost you between 1% and 4% of the sale price, including landscaping, housekeeping, and minor repairs. That amount, however, doesn't cover larger expenses you may encounter as a homeowner, such as having to replace your HVAC system or replacing a roof, which could run tens of thousands of dollars.

Tad Hill, founder and president of Freedom Financial Group in Birmingham, Alabama, said that first-time buyers should set up a separate homeownership savings fund to cover more extensive repairs. "The price range for these services is not small, so I'd suggest planning to keep at least $5,000 to $10,000 in cash, so you have it available when something breaks," he said.

Budget for Upgrades

You'll also need to leave room in your budget to set aside money for upgrades if you plan to overhaul your kitchen or update the bathrooms. Homeowners spent a median total of $15,000 on renovations in 2020, according to the latest U.S. Houzz & Home Annual Renovation Trends survey. Roughly one in three of those homeowners surveyed stated they would use credit to finance the projects. It may be wiser financially to pay cash (over 80% surveyed did), however.

In addition to avoiding new debt, you should also prioritize paying off any existing debt you have. Eliminating car loans, credit cards, or student loan payments can free up more cash that you can funnel into your home savings fund, and it can give you more breathing room in your budget.

Update Your Insurance

As a first-time buyer, homeowner's insurance is a must, but there may be other types of insurance you need as well, starting with life insurance. "Life insurance is like a self-completing plan," said Kyle Whipple, a financial advisor at C. Curtis Financial Group in Livonia, Mich. Insurance is used to reduce risk, and if you pass away, "it's nice to know that proceeds, which are tax-free, can help pay off a mortgage." That's critical if you're married and don't want to leave your spouse burdened with debt. Life insurance can also help provide cash flow to cover monthly expenses or pay college costs for your children if you have a family.

O'Neill said that when buying or updating a life insurance policy, you should ensure that you have at least enough coverage to pay off your mortgage and cover living expenses for your family for the first few years after you pass away. One question you may have is choosing a term or permanent life insurance policy.

Term Life

Term life is the least expensive option since you're only covered for a specific term. This type of policy can make sense if you're a first-time buyer and you only need coverage while you still have a mortgage.

Permanent Life

Permanent life insurance, such as whole or universal life, lasts a lifetime and can offer cash value accumulation, but it can be much more costly. If you're unsure of which to buy, Whipple suggests that you discuss your options with a licensed insurance broker or agent.

Disability

Disability insurance is something else to consider. According to the Centers for Disease Control (CDC), 26% of adults in the U.S. have some physical or mental disability. If an injury keeps you out of work in the short term or a severe illness requires an extended leave of absence, that could affect your ability to keep up with your mortgage payments. Short- and long-term disability insurance can help protect you financially in those types of scenarios.

Whipple said you might also want to investigate insurance policies or home warranties to help with repair costs, especially if you have an older home. O'Neill recommended looking into whether you can get a discount by bundling homeowner's insurance and other insurance policies together.

Review Your Retirement Plan

If your budget changes and increases after buying a home, it's essential not to neglect your other financial goals. That includes saving for retirement. According to a report by GOBankingRates, 64% of Americans are on track to retire broke, and you don't want to be one of them.

Check your contribution rate to your employer's plan if you have a 401(k) or similar retirement account at work. Compare that with your newly updated budget to ensure that the amount is sustainable and determine if there's room to increase it. If you don't have access to a 401(k), consider substituting a traditional or Roth IRA.

Saving an emergency fund for non-housing-related expenses and putting money into college accounts for your kids may also be on your list of goals.

The Bottom Line

Buying a home creates new financial responsibilities, but with the right planning, you can keep from becoming overwhelmed. Ideally, preparing yourself financially begins before you ever buy a home, but even if you're getting a late start, it's important to make planning a priority. "Making a budget is a great idea, but sometimes that starts with tracking where your money is going so you know how much you need to budget," said Whipple.

If you're struggling to make any progress toward saving after buying a home, you should take a closer look at your spending.