So you just signed the final paperwork and closed on your very first home. Congratulations are in order as this is a huge milestone to achieve in your life! Now that the stress of house hunting, negotiating and providing documentation has come to an end, it is time to take a sigh of relief knowing that you are now a homeowner. While it might be tempting to dive right into picking out paint colors, furniture, decor and personalizations that will make your new house feel like a home, it is important to make some responsible financial preparations first.
Make higher payments
Many first-time home buyers have loans with PMI (private mortgage insurance) included in their monthly payment. PMI is usually issued by the bank on a mortgage where the down payment is less than 20%. PMI is an additional payment or insurance that the bank collects to protect itself from a potential default on the loan. Typically a 20% down payment is required to secure the property as an asset for the bank in the event of a foreclosure. Depending on your type of mortgage, PMI will come off of the monthly payment once you have hit the 20% equity milestone.
This is important because if you make higher payments towards your mortgage, the PMI that you pay monthly comes off sooner because you are gaining equity quicker. Since PMI can range from $100-$300 per month, you end up saving on this additional payment in your loan earlier than anticipated. Make sure to check with your particular bank to ensure that there is not a penalty for paying down your mortgage quicker than you originally intended on. Otherwise, making higher mortgage payments when you have the additional funds is a great strategy towards saving money on your mortgage payment while also gaining equity faster.
Secure a life insurance policy
Now that you have made what is likely one of the biggest purchases of your life, it is important to find ways to secure this asset. Life insurance protects your loved ones and assets in an unforeseen circumstance, which is why it is crucial to secure a policy once you buy a home, especially if you do not have one yet. It is possible you have a life insurance policy through your workplace but remember—now you have a much larger asset that you will be making payments on. It is important to secure a policy that has enough of a cushion to support your family’s needs and allow them to stay in the home if something should happen.
Term life insurance is usually the best option if you are trying to secure peace of mind for the time being to protect your assets. Since there are numerous options available based on your health, age and term length, it can be helpful to use a service that sorts through the different possibilities and helps you choose the option that works best for your lifestyle.
Create a last will and living testament
Similarly to obtaining life insurance, creating a living will and last will and testament is a smart financial move to make once you become a homeowner. A living will is a legal document that dictates how you want your assets to be distributed in the event that you are put in a situation where you are in a vegetative state or a coma for a prolonged period of time, unable to make decisions yourself. A last will and testament, however, is a legally binding document that states how you want assets allocated in the event of your passing (you can also establish guardianship for your children or potential children during this time). Without a living will or a last will and testament, the state that you reside in will make the decisions, so it is important to invest in these documents, especially once you become a homeowner.
Hold off on financing furniture
While it is tempting to purchase all new furniture to compliment your brand new home, you most likely lived with your couch and dinette for years in your apartment without much of an issue. It could be helpful to make a list of furniture that you absolutely need in the present and then a wishlist of furniture you want in the future. From there, you can make a plan of how you will eventually furnish your new place rather than financing all new furniture right after you close. Let’s face it, furniture is expensive and you have already taken on a new debt where you are most likely paying more each month for your mortgage, maintenance, and even utilities. Give yourself (and your bank account) some time to adjust to the new pattern of payments you may have before adding any new debt.
Replenish your savings
After purchasing a new home, it is likely that you used a decent amount (or all) of your savings towards the down payment and closing costs. As exciting as it may be to shop for new housewares and accessories to fill your new home with and personalize it to your taste, remember that small purchases over time add up. Consider being a bit more frugal to start by setting some money aside for inevitable expenses that arise with homeownership. It can help to put a spending freeze on all unnecessary items the first few months after becoming a homeowner to replenish your savings account. This ensures that you have an emergency fund for any unexpected circumstances that may occur with your new home.
Take some time to acknowledge all of your hard work in the house-hunting process. You have secured a new home and will soon reap all of the wonderful benefits associated with homeownership. Just remember, it can be easy to get carried away and overspend during this exciting time, but making a few smart money moves early on will help you lay a solid foundation towards financial stability down the road.