One of the most common myths about mortgages, is we may not make advance payments, especially at the beginning of it, because all the money goes to interest. This is false because it is precisely in the first five years of a loan when the effect of prepayments is more powerful.
In spite of the above, not in all cases are recommended that advance payments, it depends on what type of mortgage you have and how organized you are in your finances. So if you have spare cash, before running analyzes and advance payment if you have other short-term debt, for example, you owe on your credit cards or have a personal loan? Sets priorities, better pay off debts you generate default interest to advance your mortgage.
The Correct Timing
The recommendation is to make payments during the first five or even eight years of the mortgage when interest is paid more and contributes less to capital. In this way, everything will go straight to speed up your term debt and interest payments will be reduced.
If you want to make advance payments after the first five years, the effect is not the same due to the accumulation of interest; during those years is when debt grows, so the extra money contributions in subsequent years only help you reduce total period no interest payable.
Note that in most cases the term of the loan and the total interest paid, but not the amount of the monthly payment is reduced. This is because contracts normally specify variables fixed and no monthly payments during the life of the loan.
Points to Consider
Virtually all financial institutions allow advance payments, so it is important that before your bonus payments, you verify the following:
- If there is some kind of penalty or charge for advance payments. In most cases does not apply, but it is always best to check.
- What is the minimum amount of money you pay to capital.
- What are the dates they can.
- Ask if you need the extra payment shall accomplish with your monthly payment.
- If it is necessary to notify about payment or automatically is payable entire surplus capital.
- If the prepayment reduces the payment deadline or the amount of your monthly payments.
When yes and when not
If you have a mortgage to 20 years or more, in which no equity amortize the first five or eight years of the loan, then it is always advisable to make an advance of at least half past one year instalments. This allows you to reverse the effect of non-amortized capital at the beginning and almost into a similar to one of 15 years in which other amortize capital since the beginning credit.
Another good reason to pay your debt before relevant projects like, having a family, a Masters or a trip.
When you have a mortgage in which you pay back capital since the beginning, the monthly pay it back and you have left enough money for the lifestyle to which you have become accustomed, perhaps it suits more to invest over your capital in other investment. Remember that this is the purpose of the credit, allows you some leeway for other investments and not lose liquidity.
In other words, you should not necessarily advance with a credit that is consistent with your profile.