Prepaid VA Mortgages: Is It Worth It?

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People with most types of mortgages, including borrowers with mortgages provided by the Department of Veterans Affairs, can save tens of thousands of dollars by speeding up mortgage payments.

This means that the borrower pays more than is due for their monthly payment, or adds an additional payment annually or at other intervals, with the remainder being applied to the principal. This is also known as a prepayment mortgage.

Note that your VA loan has two parts: the principal balance – the amount you originally borrowed to buy the home – and the interest charged on the loan. The financing cost is charged as a percentage of the remaining loan amount.

“If you make additional payments on the principal, you’ll speed up the repayment,” said Chuck Vander Stealth, founder of Quadwalls.com, a real estate brokerage in Valparaiso, Indiana. “Therefore, when the interest to be charged on your loan is calculated each month for the next installment, the interest expense will be less than it was planned to be received in your mortgage repayment table.”

In other words, interest amount the amount of savings decreases when the amount of your debt decreases. In addition, prepaying a mortgage will shorten the term of the loan, thereby reducing the number of months during which interest can be accrued.

Case in point: Let’s say you buy a home on a VA loan for which you borrow $ 300,000 at a fixed interest rate of 3% for 30 years.

“If you pay an extra $ 100 each month in principal, you end up paying off your mortgage three years earlier than usual and save about $ 20,000 in interest,” said Nicole Ruet, senior vice President of the Fairway Independent Mortgage Corporation in Englewood. Colorado.

Note that federal mortgage regulations allow homeowners with a VA loan to repay their home early without any penalties or prepayment fees.

You can use three of the most commonly used accelerated payment strategies:

Strategy 1. Pay a little more each month… As in the previous example, paying an extra $ 100 each month – or whatever is convenient for you – can shorten your loan life and save thousands of dollars in interest.

“You just need to make sure that you have indicated to your lender or loan service personnel that any additional money you assign is applied to your principal and immediately applied to your loan,” said Vander Stealth.

You can do this by contacting the company that services your loan – the name on the monthly invoices you receive – and asking how they would prefer to receive the additional monthly payment.

Strategy 2. Payout every two weeks… Instead of paying one large monthly payment or a separate additional payment every month, why not pay half of your total monthly payment every two weeks?

“Since there are 26 bi-weekly periods of the year, this equates to a full additional payment of your principal each year,” said Julie Aragon, CEO and founder of Los Angeles-based Aragon Lending Group.

For a 25-year VA loan of $ 250,000 at a 3.75% interest rate, she said, for example, you have to pay $ 642.66 every two weeks, which will result in an early repayment in 2 years 11 months and a total savings of $ 17,789.71 in interest.

Again, it is best to consult with your lending agent on how to effectively implement this strategy.

Strategy 3: dial 13th payment. Instead of making 12 payments per year, make one additional payment per year at any time of your choice, for a total of 13 mortgage payments. In other words, make two full mortgage payments within one month of your choice each year.

“Using this strategy, if you have a mortgage balance of $ 300,000 for a 30-year term with an interest rate of 4%, you will pay off your home 50 months earlier and save more than $ 34,000 in interest payments,” said Vander Stealth.

“While there is no specific time frame for when it is best to make this additional payment, it is prudent to make it consistently on the same month every year. Tax filing time would be a great time to do this, ”he said, referring to the refunds some taxpayers receive.

There are several ways to set up additional mortgage payments. Often, service personnel will ask you to send them a separate check and indicate in the note box that you want these funds to be directed to your principal, with instructions attached. Alternatively, you can make an additional payment over the phone.

“You can also set up an electronic money order that rounds off your automatic payment or adds to your check every month,” said Fairway’s Ruet. “Or you may be allowed to subscribe to a bi-monthly billing service, or an automatic billing option with your service provider that allows payments every two weeks.”

When you first start making your mortgage prepayment, she said, it is a smart idea to contact your service agent a few days later to make sure your additional payment has been received and processed properly.

Keep in mind that some borrowers are better candidates for faster mortgage payments than others.

“The real answer to the question of whether it is worth paying off a VA mortgage early is based on two factors: your current mortgage interest rate and what else you could be doing 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 about 3%, it might make sense to invest in a vehicle that can generate more than that interest rate.”

It could be your retirement fund, additional real estate investments, or even the stock market, he said. With money it’s so cheap to borrow“There is no reason to let the bank sit on your money if you could put it elsewhere and possibly get a higher return on your dollar,” Jeanette said.

But if the uncertainty about investing causes stress, it may be better to make expedited mortgage payments that will ensure a guaranteed return on your money – even if the interest rate on your loan is below 4%, Ruet said.

“If this is your best investment, if you need a forced savings plan, or if you are approaching retirement and getting rid of that mortgage is key to planning your retirement goals, consider a prepaid mortgage,” she said.

– Eric J. Martin is a reporter for Three Creeks Media.

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