When you think about buying a home, you probably don’t think about things like life or disability insurance. You might not even think about your emergency fund. But the truth is, buying a home is a huge investment and you want to protect it – and yourself.
That’s why I want to go through some practical and necessary financial protections you should not only know about but have in place before purchasing a home or closing on the sale. These protections cover every possible base in the home-buying process, including emergencies, accidents, and the event of a death in the family.
Buying a home is an exciting time in your life — and I don’t want to take away from that! I just want to make sure you have the protections you need to hopefully take some of the anxiety out of buying your home.
6 protections you’ll want in place when buying your home:
1) A fixed interest rate
As of July 2022, we are very much still in a rising interest rate environment, so this is a very important one to think about. Having a fixed interest rate on your mortgage (as opposed to an adjustable-rate mortgage or ARM) is going to ensure your mortgage payments stay the same. We don’t know what’s going to happen in the future and you can also always refinance down the road to get rid of things like mortgage insurance premiums, or MIP.
2) An emergency fund
I get it, sometimes it can be painful to see all that cash sitting in an account untouched. As a homeowner, though, you’ll find out that having that money sitting there is a huge help. In general, financial planners say to have about 3-6 months of living expenses in your emergency fund. We want to see this because home things HAPPEN, and you don’t have a landlord anymore to repair things for you with a phone call.
If it comes down to it, you should be putting less money down on your home and keeping more in your emergency fund. You don’t want to get in a situation where your air conditioning breaks or you need a new roof or any other unexpected thing happens, and you’re stuck putting the money on a credit card or other non-advantageous payment plans.
3) Life insurance
Life insurance is an important bit of protection, especially if you have children. You want to be able to set your family up in a good position if the unthinkable happens. If you’re married and if you have kids, this will give your significant other the freedom to stay in your home. Also, both spouses should get life insurance, making you equally and doubly protected.
Tip: You’re going to need more life insurance than you think, so don’t be surprised at the amount of money you’ll want to choose for coverage. At first it will seem like too much, but it isn’t.
4) Disability insurance
This is insurance in case of a disability event where you or your spouse cannot work, like an unexpected illness, recovery from surgery, or a car accident. There are a lot more people who have disability claims than you’d think. This insurance is about 60% of your take-home pay and I’ve never spoken to anybody who has ever regretted taking this step once they actually needed to capitalize on it.
Tip: Look at your open enrollment at work and see if you can opt into short-term disability OR extended short-term disability. Some workplaces may offer a 40% basic STD policy with the option to pay an additional few bucks a month for 60% coverage. Get the most coverage you can — you’ll never regret it.
5) Liability or umbrella insurance
Assuming you have both home and car insurance, liability or umbrella insurance is an add-on level of protection. These insurance plans are usually done in high increments. If you’re buying a home, it acts as an extra level of protection, essentially covering “the gap” between the home insurance policy coverage and what your home or what’s inside is actually worth. Umbrella insurance also covers not just the policyholder, but also other members of their family or household, as well as injury to others or damage to their possessions.
This is a common, but frequently missed, type of insurance that you can just add to your existing policy. Plus, it’s really affordable!
6) Create and update your will
Property ownership makes a will way more complicated, so depending on how your property is registered, it may go to your spouse, your kids, or someone else. You should make sure that your will is updated and in place so that everything is appropriate in the event of your passing.
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Thank you so much for checking out this episode of Everyday Money with Hannah Moore. I look forward to sharing different preparation tips for all the seasons of your life!
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