Buying a New Home? Get Your Debt Under Control First
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Buying a New Home? Get Your Debt Under Control First
Buying a home is exciting — and the largest purchase most people make. If you have debt, you might wonder if buying a home is feasible. You can buy a house while you have debt, but taking steps to reduce or eliminate it eases the process and saves you money.
Looking to purchase a new home in the Ann Arbor area? Be sure to contact Tom Stachler for all your home-buying needs! Call (734) 996-0000 to learn more! Our Area’s Best Lenders and rates can be found here at www.LendAnnArbor.com
Interpret Your Debt
Before you can make a plan to pay down your debt, you need to understand it. Start by asking yourself a few questions:
- Who do you owe?
- How much do you owe?
- What interest rates are you paying?
- What are your monthly payments?
Check your credit report if you need help answering these questions. Once you fully understand your obligations, you're ready to construct a payment plan.
Prioritize Debt Payment
It can be tough to decide what debts to pay first. Using a debt payment method can help you design a strategy that works.
The debt avalanche method puts debts with the highest interest rates at the top of the list. You pay the minimum amount on all debts except the one with the highest rate, which gets priority until it's paid off. This technique saves money by eliminating the highest interest rate first.
The debt snowball method pays off the smallest debt first. While it might not target the debt with the highest interest rate, crossing debts off your list can be very motivating.
Remember that utilities and Rent payments must come first. Keep these accounts in good standing to prevent them from going to collections and adversely affecting your credit score.
Plan to set aside money in a savings account as you pay down debts. You'll need it to prepare for emergencies, and you need to save for a down payment on your home.
Create a Budget That Works
You can find many ways to create a budget, but they all revolve around tracking your expenses. Check your credit or debit card statements for a breakdown.
If you don't have enough income to pay down your debts, consider ways to reduce expenses or find ways to earn extra income — even temporarily — until they're paid.
It can be hard to stick to a budget. But saying “no” to some things now can mean being able to purchase a new home down the road. Be realistic, though, and don't deprive yourself. Include some money each month for personal enjoyment.
Evaluate Loan Options
Home loans generally fall into three categories:
- Conventional loan: This loan has lower interest rates, but you may not be eligible if you have poor credit.
- FHA loan: Regulated by the Federal Housing Administration, this loan requires smaller down payments and may be available to applicants with lower credit scores.
- Special programs: These include USDA, VA, and local loans with options for low- to middle-income borrowers in certain categories.
You can also find ways to reduce your loan's interest rate. One method involves paying points on a mortgage. Also known as buying down the rate, you pay the lender a fee at closing in exchange for the lower rate. Paying points can be a good option if you plan to stay in your home for a while, but it depends on your current finances and type of loan. You can use a mortgage calculator to help you decide if this option is right for you.
Paying down debt is a worthwhile endeavor if you plan to buy a home. When you're able to purchase the home of your dreams with a mortgage you can afford, you'll know your hard work paid off.
Tom Stachler is a state of Michigan Licensed Broker working in and around the Saline, Ann Arbor, Dexter, Ypsilanti, Milan, Brighton and surround communities. Stop by his website for more information and resources at www.TheRealtyTour.com
