Are you one of the many people who have a mortgage in Spain? Do you have some money saved and want to pay off your mortgage to reduce the debts you have, but don’t know what is better if you reduce your monthly payment or term ? In this post we will explain the two options with their pros and cons.
First of all, you have to keep in mind that when you sign a mortgage you reach an agreement with the bank to return the money that you have been lent to pay your house in monthly payments (called “mortgage payment”) for a certain number of years ( called “repayment term”). Mortgage installments have two parts:
The capital to be repaid and the interest on the loan
Once in context, it must be taken into account that there is a mortgage amortization figure in mortgages . Know that means? The mortgage repayment consists of using savings that you have to reduce your mortgage debt with the bank . There are two main ways to perform depreciation :
It consists in lowering the amount of the monthly fee by paying a somewhat lower amount. The advantage of this type of reduction is that you earn in liquid money, because having to pay less you have more money month by month. The disadvantage is that the repayment time is maintained and with it the interest.
It consists in reducing the repayment term , that is, reducing the time in which you have to repay the borrowed amount. The main advantages of this are: the reduction of time in paying the mortgage and interest, because the less time, less interest. The disadvantage is that the fee to be paid will remain the same.
Once we know all the terminology, the question is what is better at the time of amortization: reduce quota or term? Before shedding light on this issue you have to take into account if you have a commission for repayment or partial cancellation of your mortgage and know what the withdrawal compensation the bank applies. Since in this way, it may not be profitable to pay off and it is better to invest our savings in another way.
Taking into account the premise of the commission for repayment and assuming that we do not have that commission or is low, among the options to reduce quota or term and analyzing its pros and cons, the best option when it comes to amortizing mortgage is to reduce term instead of quota since you minimize time and reduce interest .
However, although a priori this is the main option, it must be taken into account that when paying off mortgages, more circumstances must be taken into account, such as: available monthly income , saving capacity , employment status , risk that you want to acquire and interest rates .