Prepare Yourself for Homeownership Financially
Almost anyone can afford to own a home with proper preparation. Develop a savings plan to build up money for a down payment at purchase, for moving expenses, and for post-purchase emergency expenditures such as needed home repairs. Remember, the larger your down payment, the lower your home loan payment. America Saves can help you develop a plan with regular monthly deposits in a bank or credit union account. At the same time, reduce your credit card and other debts in order to increase your ability to afford a house. Lowering these debts will increase your credit score and your chances of getting a lower-interest loan. For information about credit and help with debt repayments, contact your local, nonprofit consumer credit counseling service or housing counseling agency.
Purchase a Home
Get qualified for a home loan before you look for a house, condo, or co-op. That will give you some idea of whether you can afford to purchase a home and, if you can, at what price. Make certain you contact at least three lenders, including your primary financial institution. This will help ensure that you get the least expensive loan for which you can qualify. Be especially skeptical of uninvited loan offers you receive through the mail, by telephone, or online. In looking for a home, most home buyers find it helpful to work with a real estate agent. Consider using an agent that will work solely for you as a buyer representative. For additional information and advice, consult Fannie Mae.
Make Home Loan Payments on Time
Making home loan payments on time will help you build wealth and avoid costly penalty fees. If payments are missed, you could lose your home through foreclosure. To help ensure that you can afford timely payments, maintain an emergency fund you can dip into when needed. There should be enough money in this account to pay for needed home repairs as well as emergency expenditures. The easiest way to build an emergency fund is to ask your bank or credit union to automatically transfer funds monthly from your checking to your savings account. What you don't see, you won't miss.
If You Have Difficulty Making Payments Seek Help
Don't wait until you miss a loan payment to look for help. Seek assistance as soon as you are aware that you might have difficulty making payments on time. Contact your lender, keeping in mind that all reputable lenders want you to succeed as a homeowner. Your lender will appreciate your call and should work with you to solve any problems. You can also get free advice from a housing expert. HUD-approved housing counselors will work with you and your mortgage company on your behalf. Call 888-995-HOPE (4673) to speak with an expert about your individual situation.
There may also be federal and local assistance programs available to help you. The Departments of the Treasury & Housing and Urban Development created the Making Home Affordable Program to help homeowners avoid foreclosure.
Be Cautious in Borrowing Home Equity
Remember that your home equity is wealth. If you take out a home equity or other second mortgage loan, you are spending your wealth. Experts agree that some reasons for home equity borrowing are more appropriate than others. Certainly one legitimate use would be covering the expense of major emergencies, like a big medical bill, if you don't have sufficient savings. Other appropriate uses include home improvements and education. Experts believe that the least appropriate use for home equity borrowing would be for unneeded luxuries. This could include an expensive car, rather than basic transportation, or a costly vacation. You should also try to avoid relying on home equity loans to cover basic living expenses except in transitional periods between jobs. Most importantly, make the decision yourself as to whether you need a home equity loan and, if you decide you do, contact at least three lenders. Be especially wary of uninvited loan offers that you receive through the mail, by telephone, or online.
Why does America Saves promote home ownership?
For decades, home ownership has been the main path to wealth for most Americans. Today, home equity - the market value of a home minus the balance on any home loans - represents more than four-fifths of the typical family's wealth. So, each home loan payment not only helps pay down the principal and interest on your home, but also builds your wealth.
How does home ownership increase homeowner wealth?
First, simply by paying off your home loan, you are building wealth. And, you are doing this each month in a regular and disciplined way. Second, it is likely though not certain, that the market value of your house will increase over time. Nationally for several decades, housing prices increased, on average, four percent annually,although the recent recession reminded us that they can go down as well as up.
Getting out of debt is the #3 goal Savers select when they pledge to save. That does not come as a surprise since a 2012 survey showed that 45% of families with annual incomes under $50,000 rely on credit cards to pay for basic needs such as rent, utilities, insurance and food. Large consumer debts can also keep you from saving and building wealth.
The good news is that there is hope. With planning, discipline, patience, and maybe some outside help, almost anyone can reduce their debts and start to accumulate wealth.
Are you in Trouble?
If you answer “yes” to any of the following questions, then you probably need to get your debts under better control:
- Can you only afford to make minimum payments on your credit cards?
- Do you worry about finding the money to make monthly car payments?
- Do you borrow money to pay off old debts?
- Have you used a home equity loan to refinance credit card debts, then run up new revolving balances on your cards?
The following pages will help you learn more about debt, how to get out of debt, and where to find help:
- What is Debt and Why is Too Much Debt Costly
- How Do I Get Out of Debt?
- Help Me With Debt: Where to Get Help
- Learn why America Saves promotes home ownership as the main path to personal wealth.
- The larger your down payment, the lower your home loan payment. Learn more about the best way to save for a larger down payment.
- How to prepare yourself financially for buying and keeping a home.
- How much wealth does your home represent now? How much wealth can you expect to build through your home in the future?
- What do all those home buying terms really mean? The U.S. Department of Housing and Urban Development provides an in-depth glossary of the most used home buying terms.
- Find out about the mortgage process, current mortgage rates, and saving for a larger downpayment. Freddie Mac and Fannie Mae are great sources for information about home buying and the mortgage process. Click here for Current Mortgage Rates.
1. Save Automatically
Save automatically through a monthly transfer from checking to savings, ideally soon after you are paid. What you don’t see, you probably won’t miss. These savings will provide funds for emergencies, home purchase, school tuition, or even retirement. Almost all banking institutions will, on request, automatically transfer funds monthly from your checking account to a savings account. Learn more about saving automatically.
2. Save for Emergencies
Having an emergency savings account may be the most important difference between those who manage to stay afloat and those who are sinking financially. In fact, low-income families with at least $500 in an emergency fund were better off financially than moderate-income families who saved less for emergencies. Without an emergency savings, you may find the need to turn to high-cost credit cards or payday loans to cover the amount you owe. Borrowing from these types of lenders could make it difficult for you to payback your debt and save successfully. Start with an emergency fund goal of $500. Learn more about saving for emergencies.
3. Pay Off High-Cost Debt
The best investment most borrowers can make is to pay off consumer debt with double-digit interest rates. For example, if you have a $3,000 credit card balance at 19.8 percent, and you pay a minimum balance of 2 percent, it will take 39 years to pay off the loan and cost more than $10,000 in interest charges. Learn more about getting out of debt here.
4. Save for Retirement
Few people get rich on wages alone. Wealth is built by consistently saving and earning compound interest, or interest on your interest, over many years. Saving now for retirement will ensure that you have enough money to live a comfortable lifestyle when you stop or reduce the amount of hours you work. And the earlier you start the better, ideally in your first job when time is on your side. But saving for retirement is important at any age, and it’s never too late to get started. You may be able to save for retirement through your workplace through a 401(k) plan or you can save on your own by putting money in an Individual Retirement Arrangement (IRA). Learn more about saving for retirement here.
5. Make a Plan
Those with a savings plan are twice as likely to save successfully. That’s where America Saves comes in. We’ll help you reach your savings and debt reduction goals when you make a commitment to yourself to save with the America Saves Pledge. Together, we’ll choose a goal and amount to save monthly. And it doesn’t stop there. We’ll keep you motivated with information, advice, tips, and reminders to help you reach your savings goal. Think of us as your own personal support system.