Tag: Financial

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 financial planning and budgeting don’t stop once you collect the keys to your new home.

All the work you’ve already done should help the process. You had to determine how much home you can afford, pull together funds for a down payment and apply for a home loan. 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 our list of what you need to do next to keep the momentum going in securing this key stage in your financial life and building a firm foundation for your future.

Review Your Retirement Plan

Whipple says that, if your budget’s changing and increasing after buying a home, it’s important 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 make sure 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. Hill says that new homeowners should be aiming to save at least six to 12 months’ worth of expenses in a liquid savings account for rainy days.

Whipple says that, if you’re struggling to make any progress toward saving after buying a home, you should take a closer look at your spending. “Making a budget is a great idea but sometimes that starts with tracking where your money is going so you know how much you actually need to budget.”

Revisit Your Budget

Agent Elizabeth H. O’Neill of Warburg Realty in New York City says 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 says, 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 before, O’Neill says.

According to a Bankrate survey, the average homeowner spends $2,000 per year on maintenance, 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 roof, both of which can easily surpass $5,000.

Tad Hill, founder and president of Freedom Financial Group in Birmingham, Alabama, says that first-time buyers should set up a separate homeownership savings fund to cover bigger 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.”

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 2018, according to the latest U.S. Houzz & Home Annual Renovation Trends survey. Of the 142,259 respondents, 37% were likely to use credit cards to fund a renovation, but paying cash (as 83% did) can help you avoid high interest and finance charges.

In addition to avoiding new debt, you should also prioritize paying off any existing debt you have. Eliminating car loan, credit card 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. If you’re struggling to make progress with debt due to high interest rates, consider a 0% APR credit card balance transfer offer or refinancing student loans.

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,” says 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 be helpful in providing cash flow to cover monthly expenses or pay college costs for your children if you have a family.

O’Neill says 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 whether to choose a term or permanent life insurance policy.

Hill says that 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 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 insurance is something else to consider. According to the Centers for Disease Control (CDC) (CDC), 22% of adults in the U.S. have some type of physical or mental disability. If an injury keeps you out of work in the short-term or a serious 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 says that you may also want to investigate insurance policies or home warranties to help with repair costs, especially if you have an older home. O’Neill recommends looking into whether you can get a discount by bundling homeowner’s insurance and other insurance policies together.

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.

 

Home Ownership: Financial Benefits to Think About

Home is where the heart is. It’s also where a big chunk of your financial responsibility lies. Home ownership is a pillar of the American dream, and while many of those in younger generations either can’t afford to or actively choose not to pursue it, those who buy in to the housing market often see major financial benefits.

There is no doubt that becoming a homeowner is one of the biggest financial decisions you will make in your entire life. It’s also undeniable that simply getting to that point requires a certain degree of financial success. You need to come up with a down payment and closing costs (generally about 3 percent to 4 percent of the total home purchase price for buyers) before you can even turn the key in the door. But among those who take on the big task of home ownership, many see financial benefits that far outweigh their initial investment, especially during tax season. Here are 5 of them.

  1. Positive perks

    Home ownership has other financial benefits that may come in handy for you someday. For example, a mortgage is considered “good debt,” and as such, it is likely to increase your credit score, provided you always make your payments on time. It also proves your credit-worthiness for other things you may want to consider, like a business loan or a new line of credit. It can even lower your monthly car insurance payments. While perks like these should certainly not be deciding factors when determining whether or not you should purchase a home, they do add up as additional benefits if you choose to opt in to the housing market.

  2. Home ownership tax deductions

    You get a number of tax breaks for owning a home, most notably a deduction for the interest and property tax portion of your mortgage. This deduction is particularly useful for off-setting the initial financial blow that comes with purchasing your property, since in the first years of owning your home you’re mostly just paying off the interest on your mortgage, as opposed to the principal. The first year you buy your home you are also able to write off any mortgage points on your loan, which can lead to pretty considerable savings depending on how many points you claimed. And if you ever decide to refinance your home after building sufficient equity in it, you also have the option of taking out a home equity line of credit, which is itself tax deductible.

    Do keep in mind: the Tax Cuts and Jobs Act, passed in 2017, limits mortgage interest deductions to $750,000 of your total mortgage debt, including any home equity credit you take out. Previously, the limit was $1,000,000 in mortgage interest deductions plus a $100,000 for home equity credit.

  3. Build up a stronger financial future

    The recent recession threw a wrench into the idea that home ownership always builds wealth over time. But the fact remains that owning a home is one of the fundamental means of accumulating wealth as we age. The caveat: you have to buy a house that you can actually afford.
    Asset-wealth is a much more secure predictor of future financial stability than income, which can—and often does, in today’s evolving economy—change from year to year. In a strong economy, home values generally increase by 3 percent to 4 percent every year, thanks to inflation and natural population growth. From 2011 to 2016, as the housing market has recovered from the bubble that contributed to the recession, home values have been increasing even higher at an average rate of 6.3 percent a year. Putting money into home ownership versus a rental is akin to the difference between putting money into an investment account versus a no-interest checking account, with the latter being only as valuable as it is in the moment while the former increases over time.

  4. Amass equity

    Every single month that you pay your mortgage you own just a bit more of your home. This is a big benefit over renting, where you’re paying comparable monthly fees without any comparable stakes. The equity in your home builds in two ways and often concurrently: (1) equity builds as the value of your home increases, and (2) equity builds as you pay off more of your loan. These two factors mean that after the first couple of years (when, again, you’re mostly just paying mortgage interest), every month you pay money toward your loan you are building up your financial resources for the future. It’s why some people refer to mortgage payments as “forced savings.”

    Want to build equity even faster? Take steps to pay off your debt quicker (like financing with a shorter term loan or paying more than you owe every month) or increase your property value (think home improvements and a focus on routine maintenance).

  5. More control over day-to-day housing-related costs

    Unless you change the terms of your mortgage, you know the base cost that you’re going to be spending to live in your home every month, both now and in the future. This affords more stability than rent, which is variable and can (and often does) change over time. And control over costs goes even further than that. As a renter, you don’t have a say over whether your landlord supplies you with energy-efficient appliances that can save you hundreds of dollars every year, but you do have to pay the utility bill either way. As a homeowner, you can make better short and long-term financial decisions that are geared specifically toward your own financial goals and abilities. While this isn’t likely going to help you save for your future in the same way building equity does, it should bring you peace of mind to know that you’re saving money everywhere that you can.

But what about the financial risks?…

Owning a home isn’t all equity building and cost cutting. Aside from the significant payments that have to be made in order to own a home in the first place, there are also some financial risks that all potential and current homeowners need to keep in mind when trying to balance their budgets.

The biggest financial risks for homeowners are in terms of maintenance costs. There’s no landlord to put the responsibility on if the roof starts leaking or the heating system goes out in the middle of winter. While you’re unlikely to face major repairs like this all of the time, they do occasionally come up and it’s important for all homeowners to have savings set aside to deal with them when they happen.

Then there’s the risk of home depreciation. Ultimately, it’s your home’s land that appreciates in value over time, barring any major negative changes in your area like a natural disaster or a school or major business closing. The structure of your home, however, tends to depreciate in value as things get worn out and lived in. While you don’t have a lot of control over what goes on in your neighborhood that may negatively impact the price of your land, you do, fortunately, have some control over maintaining and increasing value on your home’s structure by keeping up with maintenance and putting in certain home improvements. Don’t let your home’s value be something that you just tacitly accept—work toward making sure your home, and not just the land it sits on, is appreciating as the years go on.

How to Get the Best Homeowners Insurance

Owning a home has long been a cornerstone of the American dream. Even frequently relocating military members can appreciate the satisfaction of building equity while painting the walls any color they choose. But buying a home – whether it’s your first or your fifteenth – also means you’ll need to purchase homeowners insurance, so it’s wise to consider your insurance options as you search for the perfect place to call your own.

Homeowners insurance premiums are determined by a number of factors, many of which are under your control. Making a few smart decisions will give you the coverage you need and could save you hundreds of dollars each year. Consider the following tips, which can go a long way toward protecting your home and your peace of mind.

Pick a good partner. Doing business with an insurance company you trust is important. Before purchasing insurance, review the company’s complaints record and rankings on customer satisfaction and financial security. Your state’s department of insurance Web site, and industry analyst companies such as J.D. Power or A.M. Best Company, are unbiased sources of information.

Know how much is enough. Studies from construction-cost estimator Marshall & Swift/Boeckh suggest that more than 60 percent of homeowners in the United States are underinsured, primarily because they don’t insure their homes to “replacement value.” Replacement value is what it would cost today to rebuild a home from the foundation up. Replacement value can differ substantially from market value, which represents what a willing buyer would pay for a home.

Since the cost of building materials has risen in recent years, it may cost more than market value to rebuild an older home. And if you’ve remodeled or renovated your house, your insurance coverage should be updated to reflect the home’s likely increase in replacement cost. Of course, increasing your insurance coverage will raise your monthly premiums, but it could save thousands of dollars in the long run if a major claim is necessary.

Float your way to complete coverage. While a standard homeowners policy will cover the structure of your home and some of your personal belongings, it may not provide full coverage for high-value possessions, such as coin collections and jewelry.

If you have specific items for which the value exceeds your policy limits, you may elect to add a “personal articles floater” to your coverage. Though rates will vary by state and for the actual item insured, you may be able to purchase a personal articles floater for as little as $30 a year to insure your most valuable possessions for their current purchase price or recent appraised value. Often used to fully insure engagement rings or electronics, “floaters” have no deductible and usually cover a broader range of claims, such as theft or loss away from the home.

Protect your financial assets. Repairing or replacing your property is only part of the homeowners insurance equation. Your policy can go much farther to protect your financial well-being through liability coverage.

As an example, if a visitor to your home falls down the stairs and is seriously injured, the visitor’s insurance company could hold you responsible for thousands of dollars in medical bills. In this type of situation, your homeowners policy would likely cover the costs up to a specified limit, and in certain cases it may even cover legal fees that arise.

But while standard policies typically offer $100,000 in liability protection, most insurance experts recommend $300,000 of coverage or more. Increased liability coverage is especially important for homeowners with potential safety hazards, such as a swimming pool.

Consider your comfort level. As you establish your homeowners insurance coverage, you’re able to choose your deductible level, which is the amount you will pay out of your pocket when you have a claim. Opting for a higher deductible, such as $1,000 instead of $500, can lower your monthly premiums significantly. Conversely, you may be more comfortable paying a higher premium each month for greater peace of mind should disaster strike. The choice is yours to make. Your insurance company can provide a variety of premium/deductible scenarios that will best suit your needs.

Save money through safety. You may be able to save on insurance premiums by looking into safety and prevention features that often merit a discount. Consider purchasing monitored security alarms, and take precautions such as installing deadbolt locks, both of which can ward away thieves and prevent a costly (not to mention frightening) break-in. Easily accessible fire extinguishers are another good addition to the home, reducing the risk of severe flame and smoke damage.

Keep your records current.If the unthinkable should occur and you have to file a major insurance claim, having up-to-date records of your home’s contents and structural condition can be invaluable during the claims process. First, if you’ve made any significant renovations to the home itself after moving in, be sure to inform your insurance company, since it may affect the replacement cost of the home.

Next, take an inventory of your belongings, including how much you paid for each item and its current value. Make a record of your possessions, with pictures or a video camera, and store the records outside of your home so they are less likely to be destroyed in a disaster. The record can help you determine your coverage needs, and it also can serve as your proof of ownership if a loss occurs, helping the insurance company to estimate your payment.

Be aware of geography. Regardless of the homebuilding materials used, where you live can have a significant effect on your insurance premiums and coverage availability. Homeowners likely will pay more for insurance in areas prone to severe weather and natural disasters, such as tornadoes, hurricanes, earthquakes or wildfires. According to the Insurance Information Institute, the states paying the most for homeowners insurance in recent years have been Texas, Louisiana and Florida, all coastal states with above-average claims for water and wind damage.

Your rates also may be affected by the neighborhood you choose. For example, homes in close proximity to a fire department may cost less to insure. And while seclusion can have its advantages, it won’t lower your insurance rates if emergency vehicles may have difficulty reaching your home.

Get the facts. When you find a house, gather as much information as you can to determine its potential insurance costs. The age of electrical, plumbing and other systems within the home, as well as construction materials used to build the house, can affect your premiums. For example, masonry homes or less flammable roofing material can provide an insurance price break, especially in dry areas of the country that are most susceptible to fire damage. On the other hand, masonry homes could be much more expensive to insure against earthquake damage. Homeowners and potential buyers can review current building codes and materials recommendations at www.disastersafety.org/, the Web site for the Institute for Business and Home Safety.

Embrace preventive maintenance. Remember that a homeowners insurance policy is designed to repair or replace your property in the event of an unexpected major loss, and individuals who repeatedly file claims for minor problems may face higher premiums and could jeopardize their insurability. Conducting preventive maintenance on your home and repairing small problems quickly can help avert more substantial losses down the road. A number of providers offer home warranty coverages more suitable for maintenance needs involving appliances, plumbing or the like.

Financial Tips for Homeowners

Few things are more exciting than making the leap from being a renter to being a first-time homeowner. Getting swept up in all the excitement is a wonderful feeling, but some first-time homeowners lose their heads and make mistakes that can jeopardize everything they’ve worked so hard to earn. Following a series of practical steps early in the homeowning experience can save new owners time, money, and effort later down the road.

Get Properly Insured

Your mortgage lender requires you not only to purchase homeowners insurance but also to purchase enough to fully replace the property in the event of a total loss. But that’s not the only insurance coverage you need as a homeowner. If you share your home with anyone who relies on your income to pay the mortgage, you’ll need life insurance with that person named as a beneficiary so that they won’t lose the house if you die unexpectedly. Similarly, you’ll want to have disability-income insurance to replace your income if you become so disabled that you can’t work.

Also, once you own a home, you have more to lose in the event of a lawsuit, so you’ll want to make sure you have excellent car insurance coverage. If you are self-employed as a sole proprietor, you may want to consider forming a corporation for the greater legal protection of your assets.

You may also want to purchase an umbrella policy that picks up where your other policies leave off. If you are found at fault in a car accident with a judgment of $1 million against you and your car insurance only covers the first $250,000, an umbrella policy can pick up the rest of the slack. These policies are usually issued in units of one million.

Hire Qualified Contractors

Don’t try to save money by making improvements and repairs yourself that you aren’t qualified to make. This may seem to contradict the first point slightly, but it really doesn’t. Your home is both the place where you live and an investment. It deserves the same level of care and attention you would give to anything else you value highly.

There’s nothing wrong with painting the walls yourself, but if there’s no wiring for an electric opener in your garage, don’t cut a hole in the wall and start playing with copper wiring. Hiring professionals to do work you don’t know how to do is the best way to keep your home in top condition and avoid injuring—or even killing—yourself. Also, be sure to check with the local building authority and pull any necessary permits to complete the work.

Don’t Overspend to Personalize

You’ve just handed over a large portion of your life savings for a down payment, closing costs and moving expenses. Money is tight for most first-time homeowners. Not only are their savings depleted, but their monthly expenses are also often higher as well, thanks to the new expenses that come with home ownership, such as water and trash bills, and extra insurance.

Everyone wants to personalize a new home and upgrade what may have been temporary apartment furniture for something nicer, but don’t go on a massive spending spree to improve everything all at once. Just as important as getting your first home is staying in it, and as nice as solid maple kitchen cabinets might be, they aren’t worth jeopardizing your new status as a homeowner. Give yourself time to adjust to the expenses of home ownership and rebuild your savings – the cabinets will still be waiting for you when you can more comfortably afford them.

Get Help With Your Tax Return 

Even if you hate the thought of spending money on an accountant when you normally do your tax returns yourself, and even if you’re already feeling broke from buying that house, hiring an accountant to make sure you complete your return correctly and maximize your refund is a good idea. Homeownership significantly changes most people’s tax situations and the deductions they are eligible to claim.

Just getting your taxes professionally done for one year can give you a template to use in future years if you want to continue doing your taxes yourself.

Repairs vs. Improvements

Unfortunately, not all home expenses are treated equally for the purpose of determining your home’s basis. The IRS considers repairs to be part and parcel of home ownership—something that preserves the home’s original value but does not enhance its value.

This may not always seem true. For example, if you bought a foreclosure and had to fix a lot of broken stuff, the home is obviously worth more after you fix those items, but the IRS doesn’t care—you did get a discount on the purchase price because of those unmade repairs, after all. It’s only improvements, like replacing the roof or adding central air conditioning, which will help decrease your future tax bill when you sell your home.

For gray areas (like remodeling your bathroom because you had to bust open the wall to repair some old, failed plumbing), consult IRS Publication 530 and/or your accountant. And on a non-tax-related note, don’t trick yourself into thinking it’s OK to spend money on something because it’s a necessary “repair” when in truth it’s really a fun improvement. That isn’t good for your finances.

Keep Receipts for Improvements

When you sell your home, you can use these costs to increase your home’s basis, which can help you to maximize your tax-free earnings on the sale of your home. In 2008, you could have earned up to $250,000 tax-free from the sale of your home if it was your primary residence and you had lived there for at least two of five years before you sold it.

This deduction assumes that you owned the home alone—if you owned it jointly with a spouse, you could each have gotten the $250,000 exemption.

Let’s say you purchased your home for $150,000 and were able to sell it for $450,000. You’ve also made $20,000 in home improvements over the years you’ve lived in the home. If you haven’t saved your receipts, your basis in the home, or the amount you originally paid for your investment, is $150,000. You take your $250,000 exemption on the proceeds and are left with $50,000 of taxable income on the sale of your home. However, if you saved all $20,000 of your receipts, your basis would be $170,000 and you would only pay taxes on $30,000. That’s a huge saving. In this case, it would be $5,000 if your marginal tax rate is 25%.

 

Don’t Ignore Important Maintenance

One of the new expenses that accompany home ownership is making repairs. There’s no landlord to call if your roof is leaking or your toilet is clogged. To look at the positive side, there’s also no rent increase notice taped to your door on a random Friday afternoon. While you should exercise restraint in purchasing the nonessentials, you shouldn’t neglect any problem that puts you in danger or could get worse over time. Delay can turn a relatively small problem into a much larger and costlier one.

The Bottom Line

With the great freedom of owning your own home comes great responsibilities. You must manage your finances well enough to keep the home and maintain the home’s condition well enough to protect your investment and keep your family safe. Don’t let the excitement of being a new homeowner lead you to bad decisions or oversights that jeopardize your financial or physical security.