On the House: Debt Management for Would-Be Homeowners
There are a number of obstacles standing between potential buyers and their new properties, but according to research, none hinder purchases as often as unpaid debt. It’s believed that a whopping 48% of undergraduates have put off buying a home due to their loans. The question arises, then, how can debtors rein in finances to secure a property of their own?
RE/MAX Advantage Realtors Debbi and Richard Rivero outline the following methods for reducing debt so you can realize your dream of homeownership.
Pay High-Interest Debt First
An often-overlooked key to paying off debt is to focus first on paying off your high-interest loans. Experts call this the avalanche method: The less you pay in interest, the more you put towards repayment of principal. This may not work for everyone as some other loans require more immediate action but it can certainly help to avoid high-APR credit cards from draining the money that should be spent moving you forward. To get a clear overview, draw up all of your loans and identify any with high or rising interest rates.
Stop Adding Debt
This may seem like a no-brainer but, through mismanagement, it is common for those seeking to pay off debt to increase it further. If possible, your first step towards avoiding this should be to reduce credit card usage to its minimum percentage. This will help improve your credit score and ensure manageable monthly payments. It goes without saying that you should also be avoiding additional lines of credit and auto loans. A big purchase may prohibit you from making one for a house.
Create a Financial Plan
Most people can’t afford a personal accountant but that doesn’t mean your finances should go unreviewed. It’s worth spending a couple of evenings during the week building a financial overview so that you can track purchases and debts and estimate budgets and spending. To help with this, there are a number of useful apps that can be used from a smartphone so, if you’re busy, you can check in on the move. Make sure to keep all of your excel sheets and paperwork filed securely to be used as reference when applying for a mortgage later.
Negotiate Lower Rates
If you’ve been doing everything right so far, you’ll find the game is balanced asymmetrically. That means a good credit score may qualify you for lower interest rates on your credit accounts or loans. Oftentimes, the longest-standing loans (if paid off at a steady rate) are the most eligible for this tactic — reliability is an important factor for most issuers. Make sure to tell the truth about your circumstances. Failing this, consider asking for an altogether break. Even if your credit card issuer is unwilling to grant one, you may receive a reduction of some percentage points.
Review Loan Options
When buying a property, it’s very important to understand all of your options before you lock yourself into one for an indefinite amount of time. Conventional fixed-rate loans are an excellent choice for steady earners but, for those still working through debt, there are alternatives. FHA home loans, for example, require a much smaller down payment and are applicable to those with a shorter credit history. Although these types of loans are typically inflexible and charge mortgage insurance, they provide opportunities for first-time buyers with a limited budget.
Work a Second Job
There is some comfort knowing that, with enough hard work, it’s possible to get out of almost any financial strait. Whether it’s a side hustle, a part-time role, or a temporary position, if you can spare the time and it doesn’t affect your day job, another source of income could alleviate a lot of your financial worries. This lifestyle, of course, comes with serious drawbacks. While it may work to pay off debt in the short term, you should not stake long-term plans on a two-job income.
In some cases, managing your money is as important as earning it. If you’re looking to buy a property within the next year, make sure that poor financial organization isn’t the reason stopping you. And when you’re ready to take the leap, turn to RE/MAX Advantage Realtors Debbi and Richard Rivero to find your perfect first home.
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Written by: Sharon Wagner