People with most types of mortgages, including borrowers on home loans guaranteed by the Department of Veterans Affairs, can save tens of thousands of dollars by speeding up their mortgage payments.
This means that a borrower pays more than what is due for their monthly payment, or adds an additional payment each year or at a different interval, with the balance applied to the principal. This is also called the prepayment of a mortgage loan.
Consider that your VA loan has two parts: the principal balance – the amount you originally borrowed to buy the house – and the interest charged on the loan. This financing cost is charged as a percentage of your remaining loan balance.
“If you make additional principal payments, you speed up your principal repayment,” said Chuck Vander Stelt, founder of Quadwalls.com, a real estate brokerage in Valparaiso, Indiana. “Therefore, when the interest charged on your loan is calculated each month for the next payment, the interest charge will be lower than what should have been received in your mortgage amortization schedule. “
In other words, the amount of interest that accumulates is reduced when you decrease the amount you owe. Plus, prepaying your mortgage shortens the term of your loan, reducing the number of months interest can accumulate.
Example: Suppose you buy a house with a VA loan for which you borrow $ 300,000 at a fixed interest rate of 3% over 30 years.
“If you pay an additional $ 100 each month applied to your principal, you’ll end up paying off your mortgage three years earlier than normal and save around $ 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 pay off their home sooner without penalty or prepayment charges.
There are three commonly used expedited payment strategies that you can follow:
Strategy 1: Pay a little more each month. As in the previous example, paying $ 100 more each month – or an amount that’s convenient for you – can shorten the life of your loan and save thousands of dollars in interest.
“You just need to make sure you tell your lender or loan manager that any extra money you designate is applied to your principal and is immediately applied to your loan,” Vander Stelt said.
You can do this by contacting the company that handles your loan – the name on the monthly bills you receive – and asking them how they would prefer to receive the additional monthly payment.
Strategy 2: Make bi-weekly 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 two weeks?
“Since there are 26 bi-weekly periods per year, this equates to a full additional payment on your principal each year,” said Julie Aragon, CEO and Founder of Los Angeles-based Aragon Lending Team.
For a 25-year VA loan of $ 250,000 at 3.75% interest, for example, you would pay $ 642.66 every two weeks, resulting in a prepayment of 2 years, 11 months and total savings. of $ 17,789.71 in interest, she said.
Again, it is best to consult with your loan officer on how to effectively execute this strategy.
Strategy 3: Make a 13e Payment. Instead of making 12 payments per year, make an additional payment per year at your preferred time for a total of 13 mortgage payments. In other words, make two full mortgage payments for any month of your choice each year.
“Using this strategy, if you have a mortgage balance of $ 300,000 over 30 years with an interest rate of 4%, you will pay off your home 50 months sooner and save over $ 34,000 in mortgage payments. ‘interests,’ Vander Stelt said.
“While there is no specific timeline as to when it is best to make this additional payment, it is wise to do it regularly in the same month each year. The timing of tax filing could be a great time to do it, ”he said, referring to the refund some taxpayers get.
There are several ways to set up additional mortgage payments. Often times, a duty agent will ask you to send them a separate check and indicate in the memo field that you want these funds applied to your principal, with a note of instructions attached. Alternatively, you may be able to make an additional payment over the phone.
“You can also set up an electronic funds transfer that rounds up your automatic payment or adds to your check each month,” said Rueth, of Fairway. “Or you may be allowed to sign up for a bi-weekly payment service or an automatic payment option with your server that allows bi-weekly payments.”
When you start making mortgage prepayments, it’s a good idea to follow up with your agent a few days later to make sure your additional payment has been received and processed appropriately, she said.
Keep in mind that some borrowers are better candidates than others for accelerated mortgage payments.
“The real answer as to whether it’s worth prepaying your VA mortgage is based on two factors: your current interest rate on the mortgage and what else you could do with the money. instead, ”said Eric Jeanette, owner of Dream Home. Funding in Freehold, New Jersey. “If you have a low interest rate, like close to 3%, it may make more sense to invest your extra funds in a vehicle that can earn more than that interest rate.”
It could be your retirement fund, additional real estate investments, or even the stock market, he said. With money so cheap to borrow, there’s no reason to let the bank rest on your money when you could invest it somewhere else and maybe earn a better rate of return on your dollar, Jeanette said.
But if the uncertainty of investing is causing stress, it may be better to make accelerated mortgage payments, which provides a guaranteed rate of return on your money, even if your loan interest rate is less than $ 4. %, said Rueth.
“If this is your best investment option, if you need a forced savings plan or if you are nearing retirement and getting rid of that mortgage is essential for budgeting your retirement goals,” consider prepaying your mortgage, ”she said.
– Erik J. Martin is a reporter for Three Creeks Media.
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