Prepaying Your VA Mortgage: Is It Price It?
People with most types of mortgages, including borrowers on Department of Veterans Affairs-sponsored home loans, can save tens of thousands of dollars by expediting their mortgage payments.
This means that a borrower pays more than owed for their monthly payment, or adds an additional payment annually or at some other interval, with the balance applied to the principal. It is also known as prepaying a mortgage.
Keep in mind that your VA loan has two parts: the main balance – the amount you originally raised to buy the home – and the interest on the loan. These funding costs are calculated as a percentage of your remaining loan balance.
“When you make additional principal payments, you accelerate the return on your principal,” said Chuck Vander Stelt, founder of Quadwalls.com, a real estate agent in Valparaiso, Indiana. “So if the interest on your loan is calculated on the next payment each month, the interest expense will be less than what is specified in your mortgage amortization table.”
In other words, the amount of interest accruing will decrease as you decrease the amount you owe. In addition, prepaying your mortgage will shorten the life of your loan, which will reduce the number of months that interest can accrue.
Case in point: suppose you buy a home on a VA loan that you borrow $ 300,000 at a fixed rate of 3% over 30 years.
“If you pay an additional $ 100 each month on top of your principal, you will pay off your mortgage three years earlier than normal and save about $ 20,000 in interest,” said Nicole Rueth, senior vice president of Fairway Independent Mortgage Corporation in Englewood . Colorado.
Note that federal mortgage regulations allow homeowners with a VA loan to prepay their home with no prepayment penalties or fees.
There are three commonly used expedited payment strategies that you can pursue:
Strategy 1: Pay a little more every month. As in the previous example, paying an extra $ 100 every month – or an amount that is convenient for you – can shorten the life of your loan and save thousands of dollars in interest.
“You just need to make sure that you tell your lender or credit service provider that any extra money you declare will be applied to your financier and immediately applied to your loan,” said Vander Stelt.
You can do this by contacting the company that is servicing your loan – the name on the monthly bills you receive – and asking how they would like to receive the additional monthly payment.
Strategy 2: Make biweekly payments. Instead of paying a large monthly payment or a separate additional payment each month, why not pay half of your total monthly payment every other week?
“Since there are 26 biweekly periods per year, this equates to a full additional payment to your principal each year,” said Julie Aragon, CEO and founder of the Los Angeles-based Aragon Lending Team.
For example, for a $ 250,000 VA 25 year loan at 3.75% interest, you would pay $ 642.66 every other week, resulting in 2 years, 11 months prepayment, and a total savings of 17,789. She said $ 71 in interest.
Again, it is best to consult your loan service provider to effectively implement this strategy.
Strategy 3: make a 13th payment. Instead of making 12 payments annually, make an additional payment each year at a time of your choosing for a total of 13 mortgage payments. In other words, make two full mortgage payments in the month of your choice each year.
“With this strategy, if you have a 30-year mortgage balance with a 30 year term and 4% interest rate, you will pay off your home 50 months early and save over $ 34,000 in interest payments,” said Vander Stelt.
“While there is no specific time when this additional payment is best, it is advisable to make it in the same month each year. The tax return time could be a great time to do this, ”he said, referring to the refund some taxpayers get.
There are several ways that you can set up additional mortgage payments. Often times, a servicer will ask you to mail a separate check and indicate in the memo field that these funds should be credited to your client, along with an attached instruction. Alternatively, you can make an additional payment over the phone.
“You may also be able to set up an electronic transfer that will round up your automatic payment or add it to your check every month,” said Fairway’s Rueth. “Or you can register with your servicer for a bi-monthly payment service or an auto-pay option that enables bi-weekly payments.”
If it’s your first time starting prepaying mortgages, it is a smart idea to check with your administrator a few days later that your additional payment has been received and processed properly, she said.
Remember that some borrowers are better candidates for expedited mortgage payments than others.
“The real answer to whether it’s worth repaying your VA mortgage loan upfront is based on two factors: your current mortgage interest rate and what you could do with the money instead,” said Eric Jeanette, owner of Dream Home Financing in Freehold, New Jersey. “If you have a low interest rate, for example close to 3%, it may make more sense to invest your extra money in a vehicle that can earn more than that interest rate.”
This could be your retirement plan, additional real estate investments, or even the stock market, he said. Since money is so cheap to borrow, there is no reason to leave the bank on your money when you could invest it elsewhere and potentially get a higher return on your dollar, Jeanette said.
But if investing uncertainty is stressful, it might be better to get expedited mortgage payments that offer a guaranteed return on your money – even if the interest rate on your loan is below 4%, Rueth said.
“If this is your best investment option, if you need a forced savings plan, or if you are about to retire and getting rid of that mortgage is key to budgeting your retirement goals, then repay your mortgage early,” she said.
– Erik J. Martin is a reporter for Three Creeks Media.
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