A home is the single largest investment most people make. Managing or eliminating existing debt will maximize your purchasing power and allow you to get into the house you want at a price you can afford. The earlier you take steps to manage debt, the better off you will be. However, it is never too late to start. Here are a few things you can do to improve your financial position if you plan a home purchase in the next year.

Develop a Realistic Household Budget

A concrete budget, spelled out in black and white, is an absolute must. Many people avoid developing a budget because they misunderstand its purpose or underestimate how valuable one can be. It might be helpful to view a budget as a tool designed to help you pay off current debts and save for a down payment rather than as an obstacle to spending.

There are tons of resources available online to help you develop a budget that fits your lifestyle and financial goals. Once you find one you like, compile a list of all requested information, such as expenses and income sources. When looking at expenses, go back through financial statements for the past year to ensure you don’t miss any annual or quarterly payments. You’ll also need to track cash spending for a week or two and include it in your budget. Even small daily purchases add up to significant amounts of money over a month.

Research Proven Debt-Reduction Strategies

There is no one right way to pay off your debt. There are, however, two that are very well-regarded among financial experts: the debt avalanche and debt snowball repayment methods. They both ask you to make minimum payments on all debt balances and focus all extra resources on one debt at a time. How you choose that focus balance varies between the two methods. You’ll need to assess your comfort level with cutting back on spending, your desired timeline for paying everything off, and how much positive feedback you need, to stay motivated, to choose one that works for you.

The debt avalanche targets your balance with the highest interest rate first. It can save you a substantial amount of money in interest costs, but it may take months or even years before you start to see results. The debt snowball method focuses on the smallest balance first, which allows you to reduce the number of your monthly bills quickly. It is an excellent option for individuals who need to see results to stay on track.

Understand Home Loans Options

You have some control over your mortgage interest rate, so it pays to understand borrowing options. For example, paying points allows you to buy down the interest rate for a lower monthly payment. This lowers homeownership costs over time (this is a great option for people who want to stay in their home for many years). A mortgage points calculator can help you explore whether it is a good choice for your situation. Having money for a down payment, improving your credit score, and lowering your debt load can also help you secure a lower interest rate.

Debt can seriously impact your ability to purchase a home. Taking steps to manage debt, such as building a budget and using a proven debt reduction strategy, can significantly reduce outstanding balances. When this is combined with efforts to lower home loan interest, you can achieve your dream of homeownership.