Just because you have debt in your life, doesn’t mean you can’t also save for your dream home. And if you’re feeling a bit overwhelmed by your mountain of debt, you’re not alone. In fact, Americans are even more in debt in 2020 than in 2019 and have an average of $41,559 in non-mortgage debt – $7,512 more since 2019.
However, your debt shouldn’t stop you from saving for a home. With some planning, you can continue paying off your debt while also making progress toward a future purchase of your dream home. Here are some tips on how to do both.
Cut out unnecessary expenses
One of the most obvious ways to save more for a home is to reduce your current expenses. This includes coming up with a monthly budget – and sticking to it. If you’ve never made a monthly budget before, it can be eye-opening to learn where your money goes.
There are plenty of online tools to help you budget, or you can track very simply on an Excel sheet. Whatever your preference, be sure to track all your money coming in and all the money going out.
The next step is to find the line items for “wants” – such as restaurants, entertainment, coffee shops, unnecessary Amazon purchase, etc. – and make a realistic adjustment. CNBC found that each year, Americans spend more than $5,000 on average in discretionary spending.[1]
Don’t set yourself up for failure by trying to cut out ever visiting a restaurant again. But, if you’re serious about buying a home, try to reduce how often you buy restaurant food – dine-in, take-out and delivery – for at least the next year. You’ll be surprised how much you can save with this simple practice.
Consider a side hustle
Instead of or in addition to reducing your expenses, you can also increase your income in order to save. If you already have a full-time job, you could save every penny you make from a side hustle to make buying your dream home a reality. Side hustles are great because you can usually ramp them up when you have the time or push them aside when you’re busy with other things.
Some simple side gigs include driving for a ride-share service, tutoring, babysitting, dog-walking services, selling on Etsy, teaching a class online, or cleaning houses. Of course, you can also apply for more traditional part-time jobs at places such as bars, restaurants, or retail stores, but they tend to be less flexible.
You may also consider making your money do the work for you. Monthly dividend stocks pay a dividend – or small amount of income each month – to reward investors. Frequent dividend payments can mean a reliable stream of income for investors.
Pay off credit cards and high-interest loans
Credit card debt usually has the highest interest rate and the most expensive late payment fees. Overdraft fees and late payments cost Americans an average of nearly $250 a year, according to CNBC.[2] Unlike other more structured loans with a solid repayment plan, credit cards can be used willy-nilly, and consumers can rack up lots of debt quite easily.
For this reason, credit card debt is seen as highly unfavorable when your credit score is determined. And your credit score will be used to determine the interest rate on your future mortgage. The lower your credit score, the higher your interest rate – resulting in paying more in interest over the long-term.
You should try to pay off any outstanding credit card debt first while making minimum monthly payments on any other debts to avoid penalties and late fees. Next, focus on other high-interest loans. Not only will this improve your credit score over time and save you money, but it will also restore your credit card balance in case you have an unexpected emergency later on.
Consolidate debt
By consolidating your debts, you can lump all your loans into one monthly payment with the same interest rate. This can benefit you for several reasons.
First, you can usually lower the overall interest rate resulting in paying less in interest and paying off your debt faster. You may also be able to lower your monthly payment, which also lowers your debt-to-income ratio – another important factor in your credit score.
Refinance large loans
Aside from consolidating, you may also be able to refinance your larger loans to get a better rate, especially now when interest rates are notoriously low for borrowing money. You can refinance nearly any loan, but student loans, auto loans, and mortgages are most common.
Refinancing serves a similar purpose as consolidating – you’ll pay less in interest, reduce your monthly payments, and possibly pay off your loan more quickly.
Research mortgage options
If you employ all the tactics mentioned above, you’ll be well on your way to saving for your dream home. But if 20% for a down payment still seems out of reach, consider looking into mortgage options that require less upfront cash.
Federal Housing Association (FHA) loans require as little as 3.5% down, and if you or your family are veterans, you may qualify for a Veterans Affairs (VA) loan with no down payment needed. The United States Department of Agriculture (USDA) also offers mortgages with no money down if you’re a first-time homeowner buying a home in a certain area.
When planning how much to spend, be aware that you’ll need to pay closing costs in addition to the actual sales price of the home. But, you can also look at cost savings such as home buyer rebates.
Buying a home with debt is possible
Although you definitely want to make sure you have your finances and budget in order prior to buying a home, you don’t need to be completely debt-free first. Just make sure your monthly debt payment and mortgage payment are both doable with your current take-home pay.
You can do this by finding the right loan for your situation and taking advantage of current record-low interest rates.[3]
