Strategies for Protecting Your Equity
Most new homebuyers are not prepared for what comes next once they have closed on their new home loan. The excitement produced by a successful closing creates new opportunities and new dangers. New homeowners in a rush to make a house a home immediately go out and create new credit accounts. They make home improvements such as new carpet, painting or remodeling. They buy new furniture, appliances or yard equipment. Or they splurge and get a wide screen tv or a hot tub. All of these items create credit obligations that did not exist when they applied for their home loan.
The average home buyer buys the maximum home the lender will approve and these new financial obligations put further strain on an already tight budget. Most new home owners, especially first time home owners are just so excited to move into their new home and fix it up that they forget in 30 days payments are going to be due on their new mortgage, the credit cards, the furniture bill and what ever else they financed.
Equity in a home is achieved by paying down your mortgage and appreciation in value over time. That equity can be converted to cash upon sale or used in a refinance transaction to payoff other debt. Equity in a home is not to be viewed as a savings account to be tapped into every time you max out your credit cards. Equity offers you opportunities to move forward in life. We can use equity in our home to purchase a bigger home, put our children through college, purchase investment property, or to get through a financially difficult time. It is not and should not be viewed as an opportunity to continue unwise spending habits or to finance a life style. While refinancing your home and using your equity to pay off bills one time can be a wise choice, you must at some point address spending and savings habits to benefit from using equity to pay off bills.
Create a New Budget
If you start with a plan, you can protect your new investment and make sure you don’t get in over your head. Financial experts recommend that prior to moving into your new home you prepare a budget in advance. This budget includes your house payment, your adjusted utilities, taxes, insurance as well as current credit obligations. If you are a first time home buyer, you will need to factor in payments such as water and garbage that might have been included in your rent. Once you have itemized your new monthly expenses, you can then begin to think about fixing up your house.
Understanding how the new mortgage payment is going to impact your budget is the key to building wealth. If you can manage your house payment then you have more money for investing and savings which also aids in building wealth. While everyone wants buy stuff for their new home, it is best to know what your fixed expense are, itemize and prioritize what you’d like to buy and create a responsible spending plan.
Prepare for Life Situations
Let’s face it; life throws us a lot of curve balls. Illness, accidents, layoffs and other incidents all have a financial impact on us. These incidents have the negative effect of lowering our income. When our income declines we run the risk of ruining our credit. If we are not prepared for these events we could be facing a more dire situation than we care to admit. By spending wisely and creating a plan for spending and savings you can be better prepared for those curve balls.
The best time to prepare of the unexpected is when things are going well, your health is good, you have a stable job and your car is running great. Most Americans lack a savings account equal to six months reserves. When you have not prepared for the unexpected and you have acquired too much debt something as simple as a car repair bill can put your whole family budget in jeopardy and trigger a financial crisis. .
The key to building wealth is not so much determined by the
size of your paycheck, but more about how you prioritize your
spending and savings. Creating wealth through homeownership
is the number one wealth building tool most Americans have.
Don’t sabotage that opportunity by over extending yourself
financially.
