Q: I just closed escrow on my first home — a condo. I am so excited, but I’m kind of freaking out, too. I’m pretty sure I should be doing something different, financially speaking, than I did before I became a homeowner, but I have no idea what that is. Please advise.
A: Congratulations! You picked a fantastic time to become a homeowner. Although a scary time, due to all the upheaval in the real estate market, it’s definitely a great time, in terms of the opportunities available to you as a buyer. You are correct, though — your job has just begun. There are lots of things you’ll need to do — now and forever — in your house and in your financial life, starting now.
You have taken a major step into grown-up-ness, whether you are 25 or 55 years old. Right now is an interesting time to become a homeowner, because you can hardly turn on the television or open the paper without seeing some of the horrific consequences of unwise decision-making when it comes to their houses and their finances that your countrywomen are currently experiencing. It is easy to get overwhelmed, and, as a result, do nothing because (a) there’s little motivation to do anything but the fun remodeling stuff and pay the mortgage, taxes and insurance, and (b) it seems like there are so many things to do, it’s tough to know where to start.
Think of your home as your baby. Your job is to care for it, protect it, and nurture it so as to maintain and improve its value over the long haul. The lawyer in me calls this asset protection — protecting your home against the dangers of foreclosure, death, disability, divorce and so forth. I’ve had clients cringe at the mere mention of the phrase "asset protection," though, because it connotes dreary actuarial tables and discussions of divorce and other unpleasantries that no one really wants to predict or speak into existence.
Well, let me tell you — talking about divorce doesn’t cause it any more than writing a will causes death. But rather than being motivated out of fear of all the worst-case scenarios that could threaten your home, I want you to think of your project as maximizing your chances of experiencing the best-case scenario if and when life’s inevitable or unavoidable unfortunate circumstances come to pass. The coach in me calls this "smart ownership" — now doesn’t that sound like more fun than asset protection?
Asset protection is something that people view as an item you can complete in a couple of visits to your estate planning attorney and insurance broker, then check off your to-do list. Smart ownership, as I’m encouraging you to think of it, is a lifelong practice — it drives all of your financial decision-making, and some of your life, career and relationship decisions, from the perspective of how your decisions will impact your most important asset — your home — for better or for worse.
These days, all we’re hearing about is people losing their homes to foreclosure. The drop in home values is one factor causing these foreclosures, but more often I see people lose their homes because they abused their equity and borrowed too heavily against their homes. A smart ownership practice should address and plan for the impacts on your new home from your mortgage decisions, career changes, family and marital changes, taxes, death, disability, and fires and similar hazards, natural disasters and liability — at the very least.
With that said, it is ideal for you to put together a team of professionals to help you carry out your smart ownership practice for as long as you own a home. At the very least, you should have an estate planning attorney, a insurance broker, a CPA or tax professional, a mortgage broker and a Realtor that you can always call and run things past anytime. You may also want to have a fee-based certified financial planner on board to help you maintain a holistic view of all of your financial matters. Now — depending on how simple or complex your finances are, you may not actually need to hire every type of professional on the list — some things you might be able to handle yourself. To avoid trouble, get referrals to professionals that your friend or relative trusts implicitly — honest pros will tell you flat out when and whether you actually need their services and when you can do it yourself.
1. Buy a shredder. Plug it in near your mail collection point at home. Then, shred all the junk mail you’re going to get soliciting mortgage refinances and offering to throw money at you if you’ll cash out the equity in your home.
2. Put your team together. If you want to put together a team quickly, ask your Realtor — he or she should be able to get you referrals to just about everyone you need.
3. Meet your insurance agent. Lots of folks put in place the policy minimums dictated by their lender just to close escrow, and never revisit it. Homeowner’s insurance is probably the single smart ownership strategy that buys you effective protection against a large number of issues, from dog-bite liability, to fires, to certain natural disasters. Sit down across a table from your agent, review your policy, and make certain you’re comfortable with your coverage.
4. Adjust your withholdings. Discuss with your CPA how to adjust the amounts being withheld from your paycheck by your employer in anticipation of the tax advantages of home ownership — the goal is to adjust your withholdings so that you keep more cash every pay period, without having to pay taxes out when you file your return in the spring. Then, use the extra cash you bring home to:
5. Rebuild your reserves. If you are a normal first-time home buyer, your down payment and/or closing costs just exhausted the nest egg you’ve been cultivating since time immemorial. Now, you get to start saving again! Make it your goal to build a reserve fund equal to three months of your living expenses — including that new mortgage payment, property taxes and insurance.
6. Place your home in a living trust. Discuss with your estate planner what sort of asset protection vehicle you need. Living trusts work well for most folks — follow through and make sure to actually place your home in the trust so that your home will pass to the people or organizations (or pets?!) of your choice when you pass on.
7. Consider disability insurance. Statistically, you are much more likely to experience an interruption in your income due to a temporary disability than you are to die. Depending on your health, age and income, disability insurance might be a very cost-effective way to ensure that a temporary disability doesn’t cause permanent damage to your finances or cause you to lose your home.
8. Keep your home warranty in place. Unless your home is new enough to be covered by the builder’s warranty, re-up your home warranty when it expires every year. It is a risk management tool — after you pay the few hundred dollars for the policy, you know that the vast majority of big repairs that your home could need will be covered for the cost of the $40 or $50 service call.
9. Revise your smart ownership plan as your life changes. Before you have children, get married or divorced, start your own business or make any other significant life changes, consult your team of advisors to see whether you need to make any changes to your estate plan, insurance or other elements of your smart ownership plan.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook," and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online.
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