How to Create a Debt Payment Plan That Lets You Buy a Home
This article was translated from our Spanish edition using AI technologies. Errors may exist due to this process. Opinions expressed by Contractor the contributors are theirs.
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If buying a home is one of your plans for the next few years, it’s important that you have healthy finances. We show you how to create a debt repayment plan that will help you reach your goals.
Why is it advisable to repay your debts before buying a house?
Leonardo González, real estate analyst at Propiedades.com , explains that to buy a home, you must have a good credit history. This will increase your mortgage capacity, as over-indebtedness could cause financial stress in the house.
“A mortgage gives you more control over your personal finances. Hiring one while going through a phase of indebtedness is a bad decision, because it could lead to delinquency, ”he emphasizes.
The expert indicates that a loan is only an instrument to obtain a house. However, having more debt than you can easily pay will lead to unwanted situations, such as having to sell your new home.
According to the Inegi National Household Income and Expenditure Survey 2020, housing is the main non-financial asset. Even if a home offers some financial security, you should keep your debt to a minimum. The results indicate that 53.8% of them are from credit cards, nominal and / or personal loans.
How to start your debt repayment plan
González believes that a debt payment plan should be based on identifying needs and priorities. In addition, it must be supported by a realistic budget, taking into account clearly and precisely the extent of your financial commitments.
To achieve this, it is necessary to list the currently active credits and debts with the various creditors. Likewise, it details the characteristics of each taking into account the amount you owe, the interest rate, the monthly payment and / or the minimum payment.
Subsequently, the analyst recommends prioritizing payments based on debts with a higher interest rate. For this, he recommends making a tab where you can:
- Align debt with your family budget to differentiate what is really needed from what is not
- Evaluate those that improve credit history
- Quantify the interest generated by each
- Weigh the need for each loan and the possibility of paying in cash
- Analyze the goods that will not be consumed due to the level of debt
- Pay off debts in less time that do not jeopardize the finances of the house
Identify the debts you will pay first
Leonardo González suggests looking at your income stream as fixed and variable. The former have a higher degree of certainty, so you can make a realistic plan. While the latter are useful for anticipating payments or settling prepaid payments.
“To establish a debt repayment plan, you must also categorize them by duration (short, medium and long), duration of contract or type of financial instrument,” he adds.
Likewise, the expert specifies that the debts to be settled in the short term are those which do not have a cumulative cycle, such as interest charges. Therefore, they are easier to liquidate. For example:
- Loans to third parties
- One-off consumption
- Minimum amounts
- Renegotiable balances
Options for banking products
According to the analyst, if you have credit cards or nominal or personal loans, you can negotiate the debts. For example, unify them to pay them earlier.
“There is also the portability of credit, which allows by changing bank or institution to continue the financing contracted, but with a lower interest rate,” he says.
In terms of delinquency, it is possible to renegotiate each debt with your bank or credit institution to complete the payments in a more accessible scheme. And while a new interest rate cannot be agreed, it can be done with the terms and late fees, as the case may be.
“To prevent late payment interest from accumulating, the payment plan must be designed as an ‘interest cascade’. For example, making each payment when it is due or truncated, ”concludes the specialist.
Knowing the amounts, payment dates, and derivative interest will help you stick to your debt payment plan. Consistency and discipline will be your best allies to settle any commitment and avoid financial stress.