Ways Young Adults Can Battle Owing a New Home and Cut Costs

Purchasing a home is a huge financial commitment. While many people compare renting to throwing money away, owning can be a good investment if you buy in a good market. 

It is important to create a budget and stick to it. You can use spreadsheets, templates, budgeting apps or whatever works best for you. Young adults will have big decisions to make regarding home warranty, home association fees, etc. Asking themselves questions such as “Does a home warranty cover hvac?” or “How will I fix my HVAC if it breaks down?” There are many questions that new young homeowners are not sure of. 

Pay Off High-Interest Debts 

One of the best ways to free up money to pay down debt is by reviewing your household expenses. You may be able to negotiate lower rates with companies like your energy provider or even your cellphone company. This can help you save thousands per year that you could put toward paying down your debt. 

If you have a lot of debt, consider getting professional help from a credit counselor. Many nonprofit credit counseling agencies can work with creditors to get you a break on your interest rate through a debt management plan. They also offer programs that teach you how to manage your money. 

If your debt-to-income ratio is too high, a credit counselor can help you find ways to shrink it before you apply for a mortgage. Most lenders want your debt to income ratio at 43% or less to approve you for a mortgage. Ridding yourself of a large amount of credit card debt is one way to keep your DTI low. 

Create a Budget 

One of the first steps to budgeting is gathering expenses and income. Waterman suggests going through your check register and bank statements to list out all of your monthly fixed expenses, flexible expenses – like groceries or utility bills – and discretionary spending (like entertainment or gifts). If you use a debit card with built in reports on where your money went, these can help to identify trends, such as unbudgeted daily splurges or a creeping cellphone bill. 

Once you’ve got your expenses in order, prioritize paying off debt and cutting unnecessary spending. Hughes recommends that millennials spend 50% of their income on necessities, 30% on lifestyle choices and 20% on savings and long-term goals. For example, that could mean living with roommates or finding other ways to cut costs on food, entertainment and cell phone data plans. Having an emergency fund is another great way to save money for unexpected expenses. Ideally, you want to keep these savings at 3-6 months of your current salary. 

Cut Your Household Expenses 

Whether you’re juggling debt payments or saving for the big things in life, such as a new home, it’s important to create a budget. It can be as simple as a pen and paper or you can use spreadsheets, templates and even apps.

Start by writing down all of your expenses. Look for recurring costs that can be cut, such as the cost of insurance on a car you no longer drive or subscriptions to online services that you no longer use. You can also look at how much you’re spending each month in nonessential areas, such as entertainment and restaurants. 

You can also cut expenses by making more energy-efficient lifestyle changes, such as turning off the lights when leaving a room or using cold water when washing clothes. These are small changes that can make a big difference in how much money you’re spending each month. Some of these steps can even reduce your carbon footprint. 

Refinance 

If you have a good credit profile and sufficient equity in your home, refinancing can reduce your mortgage costs. However, you may need to pay closing costs again. These fees can include loan origination fees, appraisal fees, title insurance fees, credit report fees, and other charges. Some borrowers can get these costs rolled into the new loan or waived through lender credits. You should compare lenders to find a good deal. 

You can also lower your mortgage costs by switching from an adjustable-rate to a fixed-rate loan or from a government-backed mortgage to a conventional loan. If you have enough equity, you can even remove FHA mortgage insurance premiums. Make sure to check your break-even point and see how long it will take to recoup the costs. This will help you determine if refinancing is worth the upfront expenses. Using a mortgage calculator will help you calculate these costs. Also, make sure to pay off any high-interest debt before refinancing.