[EDITOR’S NOTE: SPW’s Ag Finance Editor Rhonda Uzzolino is the Marketing Manager of AgSouth Farm Credit, headquartered in Statesboro, GA. Send ag or personal finance questions for public or private answer to us here.]
Thinking about a major life purchase — a first home, buying or building that long-awaited dream home or just buying a few acres where you can enjoy nature or grow something — can be intimidating. But it doesn’t have to be.
The first thing you need to do is assess your current financial situation.
Pull together a basic financial statement that will give you a point-in-time picture of where you stand financially. Many web sites have free, downloadable financial statements you can complete and print for your records.
The financial statement asks you to list assets (bank balances, real estate, stocks and savings, etc.) and also asks you to input any debts you have (car payments, rent/mortgage, credit card, etc.). Knowing whether you have a healthy debt-to-asset ratio or owe more than your assets are worth will help you start planning for your big purchase.
Once your financial statement is complete, ask yourself these questions to determine the next steps to take:
Can I Pay Cash For That?
If you have the financial resources already available, that’s great! But before you pay cash, ask yourself: Is it wiser to pay cash and deplete my financial backup, or would it be better to take out a loan for all or a portion of the purchase and retain the cash for an emergency? Paying cash may not always the best decision, even if you have that option available to you, especially with interest rates as low as they have been in recent years.
What Kind Of Interest Rate Can I Get?
If you either don’t have cash or would like to finance a portion of your purchase anyway, let’s continue asking some questions. What is my credit score? If you’re considering taking out a loan, check your credit score through Equifax, TransUnion or Experian.
While the average credit score is around 700, excellent credit usually applies to anything 800 and above. Having a lower credit score will affect both your interest rate and how much a lender is willing to lend. Knowing what your current credit score is before approaching a lender will give you time to improve your situation should a lower score prevent you from getting a loan to make your dream come true.
Speaking of interest rates, if you’re in your 20s or 30s, chances are very good that if you were to buy a home or land today and have a good credit rating, your interest rate would be lower than your parents’ rates in the 1980’s (when Prime went as high as 21.5 percent) and even your grandparents’ rates in the 1960’s (when Prime maxed out at 8.5 percent).
How Much Do I Have To Put Down?
It’s easy to determine a down payment. Start by taking a quick assessment of what land and homes are going for in your area and determine the cost of what you want to buy. Many sites you will search also have mortgage calculators that can help you determine what your monthly payment might be.
Land loans typically require a down payment of 15-20 percent. While there are home loan programs that require either no money down or offer lower percentages of down payments, the average conventional loan requires a down payment of 5–20 percent.
The more money you can put into a down payment, the more likely you are to get a lender to help with the loan and the lower your interest rate will be.
What If I Don’t Have Enough?
Now that you know how much you need to save for a down payment, do you have enough or do you have some work to do? Start by looking at other debts you need to pay off. Consider what you need to pay off first and work on eliminating one debt at a time.
The wisest decision is usually to pay off the higher interest loans first, but there could be other factors to consider, such as if you have a small balance loan that you could pay off quickly. Knowing that you’ve marked one thing off your to do list can be a great motivator for future savings!
The Waiting Is The Hardest Part
You’ve figured out how much you can afford and how much you need to save in order to get there. Now, what? As Tommy Petty wrote, “The waiting is the hardest part.” Saving up for a down payment for your dream can seem like it takes a lifetime to get to, and the truth is that if you’re buying something substantial, saving up for the down payment can take years.
You can make that time go faster depending on how much you’re willing to sacrifice today to live your dream a bit further down the road. Can you give up vacations? Sell the shiny new car you’re making payments on and drive an older model instead? Put off new purchases that may cause you to slide back into debt? It may not be ideal for you to have a roommate or move to a smaller house or apartment in order to save, but lots of people do it as a means to realize their dream sooner.
Only you can determine what sacrifices you are willing to make and still be able to have some fun along the way.
• Separate the money you are saving for that big ticket item from the rest of your money. Open a savings account specifically for this expenditure so you will be less tempted to spend it on non-essential purchases and can judge your savings accurately. Being able to watch your dream come closer with every deposit you make can have the benefit of encouraging you along the way to stick with the program you have outlined for yourself.
• Buying land is almost always a good investment. It can afford you with either an immediate way to produce income by raising crops or livestock or by increasing in value over the years as towns and cities grow up and out.
• Although housing prices have fluctuated in the past few years, investing in a home you love is its own benefit. Additionally, in most areas, mortgage payments can be less than rent, and the principal you are paying is an investment into something you can sell down the line.
To find out about the Farm Credit association that serves you and get information on financing for everything from land purchases to home construction to farm improvements and operating expenses, visit FarmCredit.com.