5 Tips for Building Financial Literacy
Financial literacy may sound boring, but it’s incredibly important to nearly every aspect of life. Here are five tips designed to make you a smarter borrower.
UNDERSTAND YOUR CREDIT SCORE
Every borrower should know what a credit score is and how credit scores work. You may have a general sense of how you are scoring, but it’s best to know exactly what your number is as it plays an integral role in your financial standing. More importantly, it will help you understand why credit is important to obtaining a loan, specifically a mortgage. Talk to your broker about what a large role this score plays in determining your eligibility for a mortgage. They can help you accurately obtain this information.
KNOW WHY INVESTING CAN PAY OFF DRAMATICALLY
Your may not be convinced that buying a home is even worth it. Maybe you think, “Why buy when I can just rent?” But buying a home is a big investment that can pay off in many ways. Here are just a few worth sharing: homeownership establishes and/or builds generational wealth, it’s a stable investment that’s both a place to live now and an asset you can pass down, it’s financially beneficial in terms of tax breaks and property value appreciation, and you’ll never have to worry about rising rent prices again.
UNDERSTAND INTEREST RATES AND DTI
The interest rate on a mortgage could mean everything or nothing at all. It’s important to ask your broker to explain the slightest difference in interest rates. This can end up saving you quite a lot of money in the long run. Ask to be walked through several accrued interest scenarios. This will be invaluable when it comes to that final decision. Additionally, your broker can help you understand your debt-to-income ratio (DTI). This is important, as it indicates how much you can afford and helps determine what mortgage you qualify for. Most lenders set a 50% limit because higher DTI means increased risk, and lenders are always looking to mitigate risk. Avoiding the max DTI benefits you as it ensures you’ll be able to live comfortably while paying back your debt.
HARNESS THE POWER OF A BUDGET
Creating and tracking a budget can not only contribute to your ability to buy a house but to your overall financial health. Find a sample budget online sample and replicate it. There are countless resources, apps and websites galore. Know that living by a budget can be easier said than done. But the key to budgeting (and the hard part) is sticking to it, but the financial freedom you’ll gain is worth it.
THE DOWN PAYMENT MYTH
Interestingly, a good portion of financial literacy is debunking common myths. In most surveys, more than 75% of renters think lack of funds for a down payment or closing costs is an obstacle to homeownership. However, a down payment is not as big of a hurdle as you may think. Twenty percent is old hat. You may be surprised to find out that, right now, you can put down as little as 3% on a conventional mortgage, 3.5% on FHA, and 0% on VA or USDA.
