When applying for a mortgage to buy or refinance a home, debt plays a large role in determining your loan allowance. While paying an entire section of debt off at one time (i.e. student loans) may seem daunting or impossible, take a look at five effective ways to pay off debt in a timely fashion before buying or refinancing your home loan (scroll down for infographic).
5 Quick Tips – Pay off Debt Before Buying or Refinancing
Pay off debt more quickly by paying more than the minimum
Break the habit of paying only the minimum amount due each month. While it might be enticing to opt for the minimal monthly amount, it only prolongs the payments and usually costs you more money in the end. A helpful way to prepare for paying more than the minimum is to factor a higher amount into your monthly budget. This way you know exactly how much you can spend after you deduct your rent/mortgage, utilities, loans, insurance, car payment, and credit cards.
Whenever you open a new credit card, take your total amount owed and divide it by how many months you need/want to pay it off. Not only does this help balance your bills, but it also helps avoid paying a very large amount your last month.
If you feel comfortable, try doubling the minimum payment so you can pay off your debt twice as fast. You’ll be surprised where you can find the money when you sacrifice happy hours, lunches, drinks, and so much more.
Pay off debt with highest interest rates
Doing this will allow you to save on total interest paid by knocking out the worst interest-accruing culprit first. This will really help you on your payments that will take years to pay off as the interest rate will have a high impact on your finances. Imagine how much you can save if you knocked out your highest interest rate payment first! This method particularly works well if you have one or a couple debts that have high interest rates. If all your interest rates hover around the same rate, it may not be as effective for you to try this method.
Pay off smallest debts first
While this may not be the most mathematically quick way to pay of your debts, there is something to say about small victories. The theory is that if you pay off your smallest debt first, you’ll have the motivation to keep going and stay on track with your other debts. Paying off smaller amounts lets you reduce the number of open accounts you have more quickly. These small wins can also create momentum; if you’re someone motivated by psychological wins, this method is for you.
Tackle credit card debt if you’re trying to quickly boost your credit score
If credit card debt is pulling down your credit score and is preventing you from qualifying for a mortgage, focus your energy in this area. Pay off debt on credit cards where you have reached or come close to your credit limit as this can give you a boost in credit score. Your debt utilization ratio (the amount of debt you have compared to the amount of credit you have) is a large part in how credit bureaus determine your credit score. Focusing your energy in this area can help you qualify for a mortgage once your credit score reaches a certain threshold.
It may take some time to thoroughly go through all of your expenses, but by doing so, you can see where you spend money that may be unnecessary. For example, after looking at your credit card statement last month you see that you spent $1000 total for the month on restaurant food. Now think back… were all of these dining-out experiences necessary? Since the answer is most likely no, think about how to cut back. If you eat out every day for lunch, pack your lunch instead. Not only can this save you money, it’s can also be the healthier option as well. Spending $50 a week at the grocery store to cover your breakfasts and lunches will save you so much money over the course of a month. This allows you to use your excess money to help pay off some of your debts.
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