Paying off debt can be difficult, especially when your budget is tight already. However, there is light at the end of the tunnel.
Below you will find tips to pay off your debt. By doing so, you will be one step closer to securing a mortgage loan and purchasing the home you’ve always wanted. To learn more about securing a mortgage loan, please contact KFS Mortgage Company.
Determine How Much You Owe
Though it's daunting, the first step to paying off your debt is understanding how much you owe. A clear understanding of these numbers will empower you to make a repayment plan that works for your specific situation. Use this Debt Worksheet to see precisely what you owe.
Create A Budget - And Stick to It
Setting expectations for your monthly earnings and spending will ensure that you're saving enough to pay off your debts and prevent future debt. Here are some tips for creating your budget:
- Track your spending: By learning where your money goes each month, you'll be able to see where you can make changes to your spending.
- Calculate your take-home income: Make sure you include every source of income.
- Set financial goals: Do you have any other plans besides paying off your debts? Creating a timeline for all your goals can help you stick with them.
- Create a budget: Using the information from above, determine how much money you have at the end of the month by subtracting monthly expenses from your income. If you're in the negative, you'll need to decrease spending or increase your income.
Debt Reduction Methods
Here are some other methods to pay off your debt:
Snowball Method: With the snowball debt reduction method, you pay off your debts from smallest to largest. You continue to make the minimum payments on all your debts. In addition, you pay as much as possible on your smallest debt to pay it off as quickly as you can. When the smallest debt is paid in full, you take the money you were putting toward that (the minimum payment plus the extra payments) to pay the next smallest debt until that one is paid off, and so on until all debts are paid off. Each debt paid off grows your payment power—like a snowball.
Avalanche Method: This method involves first paying off the debt with the highest interest rate. You then take on the next highest interest rate, and so on. This methods helps you to pay the least interest over time. This method is similar to the snowball method, in which you focus on paying off one debt at a time until all is paid off. However, this method can take longer to see results than the debt snowball method because you may have larger balances on your high rate accounts.
Consolidation: Debt consolidation combines multiple debts into one loan. Doing so can reduce payment costs and interest rates. You’ll need to have good enough credit, adequate income, and a low enough debt burden to qualify for a consolidation loan.
Increase Your Income: Taking on more work (extra shifts, a side gig, etc.) can provide extra income to help eliminate smaller debts faster and provide more financial wiggle room.
Windfall: Use all extra income to pay down debt. This technique should be used with any expected or unexpected income, including tax refunds, bonuses, lottery winnings, extra commissions, or overtime.
Will you plan to use these tips to pay off your debt? Want to see how a mortgage payment will fit into your future budget? Contact one of our lenders at KFS Mortgage Company to learn more.