Financial Planning for Homeowners

Did you know it's recommended for all homeowners to make a detailed plan every year, if not quarterly? A structured financial plan encourages strategic spending and saving and ensures the household is prepared for both expected and unexpected expenses.

This particular process is great to do on a yearly basis because income and expenses aren't stagnant and neither are our lives. In fact, lifestyle creep is an easy way to get sideswiped by your own growing spending habits. Even if you’ve never created a financial plan, it’s never too late to start. 

1. Assessing Your Financial Situation

The first thing to do when building a plan is assess your income and expenses. Even if you did this in the past, it’s always a good idea to do it again. Some spending habits tend to become just that: a habit. Habits can be good or bad. Just make sure to develop good spending habits, while avoiding bad ones.

Take time to get to know your net worth. Like any other component of your financial life, your net worth changes year over year. Net worth is calculated by subtracting all of your liabilities (debt, mortgages, expenses, etc.) from the sum of all of your assets (cash, real estate, etc.). If your assets outnumber your liabilities, you have a positive net worth and vice versa. Knowing your net worth helps you set goals and make changes based on where you want to be financially in the coming years.

Understand your credit score and its impact. A credit score isn’t just for you to see your own financial well being, it also shows lenders your credibility when it comes to paying back loans.

2. Building an Emergency Fund and Extra Savings

Having an emergency fund makes all the difference when your heater goes out in the middle of winter, or your only source of transportation needs repairs. Not having an emergency fund can lead homeowners to put the cost of repairs on a high interest credit card and pay more in interest over time than if they’d had extra cash stashed for that very need.

Overall, the most important rule of thumb is to have enough money in your emergency fund to cover essential costs for 3-6 months. You decide what your essential costs are, but ultimately it’s anything necessary for survival (mortgage payments, food money, commute costs to and from work, etc.)

Just remember to save with a purpose. Even so, we’ve listed a couple of great resources to get you started on building and/or maintaining your own emergency fund:

1. Set a Goal: Let’s be honest, your circumstances are the true determining factor in setting an ideal emergency fund amount for your household. Start by playing with the free Banzai Emergency Fund Calculator to get a good idea for what’s best in your situation.
2. Save Strategically: You might consider choosing a high-yield savings account or similar instead of a traditional savings account  for your emergency fund money. Why shouldn’t you use a certificate of deposit (CD)? CD’s lock your money in for anywhere from a few months to several years. Meaning, there’s a lack of liquidity in your money: you can’t just take it out whenever an emergency happens in your life.
3. Find Extra Cash: Take a look at where you're spending your money and how you might cut back a little on expenses to find extra cash to save. Unsure of ways to do that? Check out our article on 8 Tips to Reduce Your Food Bill—perhaps you’ll find there’s more room to save than you think!
4. Replace Used Funds ASAP: Since an emergency fund is used for emergencies, it’s vital to replenish your savings for the next big surprise when that emergency passes and you have room in your budget to save.

3. Understanding and Managing Your Mortgage

The number one consideration when it comes to financial planning for homeowners is understanding the terms of your mortgage. This includes asking all the right questions at the purchase of your home: 

1. If applicable, what is the private mortgage insurance (PMI) and when is it dropped?
2. How long will my current interest rate be locked in for?
3. Does my mortgage payment include an escrow account for property taxes and homeowners insurance?
4. What is the length of the loan (15 years, 30 years, etc.) and how does it impact my monthly payment and total interest paid?
5. What is the current interest rate and how does it affect my monthly payment?
6. What type of mortgage do I have (fixed-rate, adjustable-rate, FHA, VA, USDA, etc.) and why is it the best option for me?

All of these questions are great for those looking to get a mortgage and those who already have one. In truth, understanding your loan is one of the first steps to making a financial plan that benefits you in the future.

Once you understand your loan terms, start looking at strategies you can use to pay off your mortgage early. This includes using an early mortgage payoff calculator to see how much you’ll save in interest based on different scenarios. Then, pinpoint the best, most feasible option for you! 

5. Protecting Your Investment: Home Maintenance, Repairs, and Insurance

When planning your budget, don’t forget to plan for regular maintenance to your property and create a schedule so those costs don’t sideswipe you unexpectedly. Regular and seasonal maintenance extends the life of your home and ensures you get the most out of all of your appliances including sprinklers, furnaces, air conditioning units, water heaters/softeners, etc. Another good thing to consider, if you haven’t already, is to invest in good home security. 

Whether you are a new homeowner or an existing one, homeowner’s insurance is a must. Make sure to review and update your insurance policy regularly. Your needs and coverage requirements may change over time. Try to find ways to reduce your insurance premiums if that’s the route you want to take. Remember, though, reducing a premium is usually a trade off. For example, you could increase your deductible, or the amount you pay out of pocket before your insurance kicks in, to pay a lower premium, but you’ll pay more out-of-pocket money in situations where insurance is needed. If you’ve built a great emergency fund, however, perhaps a higher deductible won’t hurt.

4. Planning for Taxes

Though you might not know it, there are tax benefits to homeownership:

• Mortgage Interest Deduction: You can deduct the interest you pay on your mortgage from your taxable income. This can be a substantial deduction, especially in the early years of your loan.
• Property Tax Deduction: Property taxes are something you’ll have to pay on a home whether or not you’ve paid your mortgage off in full or not. The good news: you can deduct a portion of your property taxes from federal taxes (up to a certain limit). 

Keep track of property tax changes by:

• Review Your Property Tax Bill: Your annual property tax bill details the current assessed value and tax rate for your property.
• Check Your Local Assessor's Office Website: Most local government websites have a wealth of information, including property tax rates and assessment information.
• Sign Up for Notifications: Some assessor's offices have sign ups for email or text alerts regarding property tax changes.

5. Utilizing Home Equity

Your home’s equity can play a crucial role in financial planning for your household. Home equity is the difference between how much you have left on the principal of a home loan and how much the house is worth. You can use your home equity to pay for things like home improvement projects, debt consolidation, and even college education so long as you remember to use it responsibly.

If any of the above factors are at play in your foreseeable financial future, it might be a good idea to look into financing options that leverage your home equity. Here are a few:

• Home Equity Loan: A fixed-rate loan where you receive a lump sum of cash that equates to a percentage (usually up to 80-85%) of your home's equity, minus what you still owe on your primary mortgage. You’ll pay this loan back with interest, similar to your mortgage.
• HELOC (Home Equity Line of Credit): Similar to a credit card, a HELOC lets you draw money out as needed, up to a certain limit. Again, you still have to pay interest as you pay off the amount you borrow.
• Cash-Out Refinance: A cash-out refinance is where you refinance your existing mortgage to include the amount of home equity you’ve accrued on your property. You then pocket the difference and the new loan replaces your previous mortgage, accompanied also by new terms including a different interest rate.

As with any loan or line of credit, be sure to use home equity loans wisely and understand both the pros and cons to leveraging your home equity. Sometimes, the amount of immediate cash you get is worth how much interest you’ll pay over time, sometimes it isn’t. But essentially it’s up to you. For example, a HELOC typically has a variable interest rate, which means if interest rates rise, the amount you pay in interest also rises. If leveraging your home equity is the route you want to take, mitigate the risks by following these five steps:

1. Only borrow what you need.
2. Create a solid repayment plan and stick to it.
3. Consider fixed rates if that option is available.
4. Keep an emergency fund.
5. Get professional advice.

6. Creating a Budget

The most important thing when creating a budget is learning to categorize and prioritize expenses. Expenses can be split into two main categories: fixed and variable. Fixed expenses include costs such as mortgage payments, property taxes, and home insurance. Variable expenses include utilities, groceries, and home maintenance supplies/costs.

After understanding which expenses fit into which categories, the next step is to prioritize the most necessary ones. Identify which costs are essential expenses, which are necessary but flexible (you can get away with limiting the cost or quantity of the objects), and which are unnecessary. List and categorize your expenses any way that works for you—in a Google Sheet, printed financial planner, etc.

Next, make a plan to cut unnecessary expenses. Which expenses can be lowered or cut all together? Check out our article 14 Ways to Cut Household Expenses for strategies to cut costs.

And finally, start building your budget. Here are a list of tools Banzai provides for free to help you in this task:

Coach: Create a Budget

Calculator: Budget Calculator

Article: Envelope Budgeting [Cash vs. Digital]

Owning a home is a significant milestone, but it comes with its own set of financial responsibilities and opportunities. Whether you're a new homeowner or have been one for years, financial planning is essential to maintain and improve your standard of living. By assessing your financial situation, creating a budget, building an emergency fund, managing your mortgage, and planning for taxes and home maintenance, you can ensure your financial health and safeguard your investment.

Remember, financial planning is not a one-time task but an ongoing process. Stay proactive, seek professional advice when needed, and use the tools and resources available to you. By doing so, you'll be well-prepared to face any financial challenges and enjoy the many benefits of homeownership.