Bought Your First Home? Take These 4 Steps Right Now

Oct 27, 2024

Set aside money for the home, but don't neglect other goals

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You've calculated how much you can afford to pay for a home, pulled together funds for a down payment, and applied for a mortgage. Despite all the effort it took to find and purchase the property, the importance of financial planning and budgeting doesn't change once you've collected the keys to your new home. You can protect your investment in your first home by creating a homeowner-oriented budget, building a nest egg for home upgrades, getting sufficient insurance coverage, and reviewing (and potentially updating) your retirement plan.

Elizabeth O'Neill, a licensed associate broker at Sotheby's International 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 crucial 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, in addition to any increases in expenses associated with higher utility costs, homeowner's association (HOA) 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, which includes landscaping, housekeeping, and minor repairs, will likely be between 1% and 4% of the sale price. That amount, however, won't cover larger expenses you may encounter as a homeowner, such as having to replace your HVAC system or roof, which could cost you tens of thousands of dollars.

Tad Hill, founder and president of Freedom Financial Group in Birmingham, Ala., 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.

If you plan to overhaul your kitchen or update the bathrooms, you'll also need to leave room in your budget for upgrades. Annual spending on renovations was approximately $472 billion in Q3'24, according to the Harvard Joint Center for Housing Studies' latest Leading Indicator of Remodeling Activity (LIRA) data.

While you can use credit to finance your renovation projects, it may be a better financial move to pay cash instead, if possible. In addition to avoiding new debt, you should also prioritize paying off any extant debt you may have. Eliminating car loan, credit card, and 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.

It may be helpful to set up a dedicated savings account for repairs or renovations and add to it monthly.

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 and retirement planner at C. Curtis Financial Group in Plymouth, 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.

If you're struggling to make progress on your debt due to high interest rates, consider an 0% introductory APR balance transfer credit card and/or refinancing your student loans.

You should also assess whether you're better off choosing a term or permanent life insurance policy. If you're unsure of which to buy, Whipple suggests that you discuss your options with a licensed insurance broker or agent.

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

Permanent life insurance, such as whole or universal life, lasts a lifetime and offers potential cash value growth. However, this type of policy can also be much more expensive.

Disability insurance is something else to consider. According to the Centers for Disease Control and Prevention, 28.7% of adults in the United States had a physical or mental disability as of July 2024.

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 these types of scenarios.

Whipple added that you also might 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 policies together.

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau (CFPB) or with the U.S. Department of Housing and Urban Development (HUD).

Even if your budget changes after buying a home, it's crucial that you don't neglect your other financial goals. That includes saving for retirement. According to an AARP survey, one in five Americans are on track to retire broke, and you don't want to be one of them.

If you have a 401(k) or similar retirement account through work, it's worth double checking your contribution rate. Compare that amount against your newly updated budget to ensure it's sustainable and determine whether there's room to increase it. If you don't have access to a 401(k), consider substituting a traditional or Roth IRA.

In addition to saving for retirement, make sure you're also setting aside money in an emergency fund for non-housing-related expenses and, if applicable, college savings accounts for your children.

After purchasing your first home, you should create a budget to account for your new homeownership costs, in addition to updating your insurance coverage. Also make sure to keep saving toward retirement accounts and set some money aside for any unexpected household expenses, such as replacing a broken dishwasher or replacing a window.

Most people buy a house using a mortgage loan, and those payments (plus any additional fees) are usually due monthly. You'll also need to pay for homeowner's insurance. All of these costs should be factored into your new homeowner's budget.

A good rule of thumb for new homeowners is to aim for saving at least six to 12 months' worth of expenses in a liquid savings account for rainy days.

Buying a home creates new financial responsibilities, but with the right plan, you can keep from becoming overwhelmed. Ideally, preparing yourself financially begins before you buy a home, but even if you're getting a late start, it's important to make planning a priority.

If you're struggling to save money 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 need to budget," said Whipple.

Joint Center for Housing Studies of Harvard University. "A Turn to Growth Expected for Residential Remodeling."

Centers for Disease Control and Prevention: Disability and Health Promotion. "Disability Impacts All of Us."

Federal Trade Commission. "Mortgage Discrimination."

AARP. "New AARP Survey: 1 in 5 Americans Ages 50+ Have No Retirement Savings and Over Half Worry They Will Not Have Enough to Last in Retirement."