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4 Ways You Can Avoid Debt When Buying Your First Home

Written by Posted On Monday, 14 January 2019 08:14
4 Ways You Can Avoid Debt When Buying Your First Home

If you’re a first-time home buyer, chances are you’re attempting to navigate the real estate market to the best of your ability while trying to save as much money as possible and not go into a huge amount of debt. Here are four ways you can avoid debt while shopping for your first home.

1. Put down a 20% down payment

A common mistake first-time home buyers make is not putting down a large enough down payment. In general, you should make sure you can cover a down payment of at least 20% of the home’s price. You can start saving up for a down payment by creating a monthly budget and lowering your expenses, borrowing from your retirement plan, getting a second job, or looking into down payment assistance programs.

2. Research low down payment programs

If you’re struggling to save for a 20% down payment, there are a variety of low down payment mortgage programs that offer assistance and competitive mortgage rates for first-time home buyers. One of the easiest loans to qualify for with a low down payment is an FHA loan. With this type of loan, you can put down as little as 3.5% for a down payment. Another low down payment option is a USDA loan. With this loan option, you’ll have to buy a house in an eligible rural area, however, no down payment is required with this program. Note: if you put down a down payment of less than 20% on a house, you may be making higher mortgage payments each month.

3. Compare different types of mortgage options

Another way you can avoid debt when shopping for your first home is to pick the right type of mortgage that best suits you and your finances. The two most popular types of mortgage options that are considered by buyers in the home buying process are a 15-year mortgage and a 30-year mortgage. With a 30-year mortgage, you’ll be making lower monthly payments, which can help you put more money toward savings. However, 30-year mortgages typically come with a higher interest rate, so you’ll likely have to pay more money over time. If you can afford to pay higher monthly mortgage payments, opt for a 15-year mortgage. With this mortgage you’ll be making higher monthly payments at a lower interest rate, letting you build equity faster and come out debt-free after 15 years.

4. Save for closing costs

Most first-time home buyers underestimate the cost of homeownership and don’t have enough saved up for closing costs. Closing costs are fees associated with your home purchase that are paid at the closing of a real estate transaction. These fees can include an application fee, an appraisal, a courier fee, a transfer tax, an underwriting fee, a home inspection, homeowners’ insurance, and recording fees. In general, homeowners will pay between 2%–5% of the purchase price of their home in closing costs.

In addition to closing fees, it’s a good idea to budget for any repairs you may have to make after closing. If a home inspection reveals that the refrigerator isn’t working or the washer and dryer are broken, your home warranty can save you money on repairs or replacements. If you don’t have enough saved or you don’t invest in a warranty, you’ll be forced to pay out-of-pocket for any repairs or replacements, so make sure you have extra cash on hand just in case.

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Kealia Reynolds

Kealia is a writer for House Method, a home and garden site, and covers a variety of topics including real estate, interior design, and home wellness.

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