American debt is on the rise. In fact, the average American currently holds $41,559 of non-mortgage debt, $7,512 more than in 2019. Because those figures are so staggering, many would-be buyers think they have to put off their dream of homeownership until they can get a better handle on their finances. In reality, however, it is possible to save for a home while paying off debt.
Believe it or not, you don't have to be totally debt-free to buy a home. Lenders simply want to ensure your debt will continue to be manageable if you add a mortgage payment into the mix.
With that in mind, when you're getting ready to buy a home, it's a good idea to streamline your debts and debt payments as much as possible. Here are a few ways you can make that happen.
The first option is to look into consolidating your debt with a debt consolidation loan. As the name suggests, a debt consolidation loan is a personal loan that can be used to pay off all of your existing debts and consolidate the remaining balance into one monthly payment.
In this case, the fact that interest rates are so low (about 9.34%) is an added bonus. There's a good chance you will be able to secure an affordable interest rate on your debt consolidation loan, which means that you will likely pay less overall.
If your debt is mostly from student loans, you may benefit from refinancing or consolidating. The refinancing process involves taking out a new loan with better terms and using it to pay off your old loan. The main advantage of refinancing is that you will likely secure a better interest rate, which can help you lower your monthly payment.
Refinancing is not right for everyone, though. In particular, If you have mostly federal student loans, it may make sense to talk to a financial advisor before you apply to refinance. Refinancing would involve moving to private student loans, which can cause you to lose your eligibility for loan forgiveness. In addition, private student loans do not offer the option for income-driven repayment plans.
Once you've decided how you want to structure your debt, the next step is to budget for it. Above all, you should be sure to include the minimum payment for any loans in your monthly expenses. However, if you have extra income to spare at the end of the month, you should consider allocating those funds for making larger-than-normal payments.
Although it is OK to have some debt when you buy a home, ideally, you should try to pay down your debts as much as possible as you're preparing to buy.
Aside from getting your debt into the best shape possible, you also have to save for your new home. Below are three steps you can take to start putting money aside on a regular basis.
It can be hard to save for home if you don't know exactly what you’re saving toward. You're going to want to take some time to educate yourself on the costs of buying a home.
First, there is the down payment to consider. It's important to note that making a 20% down payment is still considered the gold standard. However, having a down payment of that size is not explicitly required. These days, it's possible to buy a home with a down payment of only 3%-5% of the home's purchase price.
In addition to your down payment, you also need to plan to pay for your closing costs. Closing costs are fees associated with transferring the ownership of the property or taking out a new loan. They include costs such as your title insurance fees, your home inspection fees, and your appraisal fees. Typically, they add up to around 2%-5% of the home's purchase price.
Keep in mind that you can always negotiate some of these costs. This includes a home buyer rebate, where the real estate agent refunds some of their commission to the buyer, typically around 1% or less of the sale price. You can also negotiate with the seller after the home inspection and ask them to make some concessions for you. Although these two strategies won't pay for your home, it will help you save a little bit of money.
Once you have a better idea of how much you can expect to spend on the upfront costs of buying a home, the next step is to set a regular savings goal. To do this, take a look at your budget and determine how much you can set aside in a savings account each month. Then, after you've decided on an amount that makes sense, make sure to follow through and to add money to your savings account on a regular basis.
If you don't make enough money to pay down your debts and save for a home at the same time, one option is to increase your income. In particular, you could consider taking on an additional part-time job or starting a new side hustle. While adding another income stream may not be easy, it can only benefit you when you are ready to start the process of being approved for a home loan.
If there is one key takeaway, it’s that saving for home while paying off debt can be done. It just takes a little more planning and forethought on your end.
Use the tips in this post to help you get started on your journey of becoming a homeowner. Armed with this knowledge, you should have a better idea of what you can do to start working toward achieving your financial goals.