People with most types of mortgages, including borrowers with Department of Veterans Affairs-backed home loans, can save tens of thousands of dollars by accelerating their mortgage payments.
This means that a borrower pays more than is owed 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 known as mortgage prepayment.
Think of your VA loan as having two parts: the principal balance — the amount you originally borrowed to buy the home — 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 accelerate your principal repayment,” said Chuck Vander Stelt, founder of Quadwalls.com, a real estate brokerage firm in Valparaiso, Indiana. “Therefore, when the interest to be charged on your loan is calculated each month for the next payment, the interest charges will be less than what was to be received in your mortgage amortization schedule.”
In other words, the amount of interest that accrues is reduced when you decrease the amount you owe. Additionally, paying off your mortgage early reduces the term of your loan, reducing the number of months over which interest can accrue.
Example: Suppose you buy a house with a VA loan for which you borrow $300,000 at a fixed interest rate of 3% for 30 years.
“If you pay 0 more each month applied to your principal, you’ll end up paying 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 without penalties or prepayment charges.
There are three 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 amount suits you — can shorten your loan term 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 applied to your loan immediately,” Vander Stelt said.
You can do this by contacting the company servicing 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 payments every two weeks. Instead of paying one 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 towards 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 2-year, 11-month prepayment and total savings. of $17,789.71 in interest, she said.
Again, it’s best to consult with your loan manager on how to execute this strategy effectively.
Strategy 3: Roll a 13and Payment. Instead of making 12 payments per year, make one additional payment per year at the time of your choice for a total of 13 mortgage payments. In other words, make two full mortgage payments in a month of your choice each year.
“Using this strategy, if you have a mortgage balance of $300,000 over a 30-year term with an interest rate of 4%, you’ll pay off your home 50 months sooner and save over $34,000 in mortgage payments. interests,” said Vander Stelt.
“While there is no specific time as to the best time to make this additional payment, it is wise to consistently do so in the same month each year. The tax filing deadline could be a great time to do that,” he said, referring to the refund some taxpayers are getting.
There are several ways to set up additional mortgage payments. Often a servicer 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 an instruction note 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,” Fairway’s Rueth said. “Or you may be allowed to sign up for a bi-weekly payment service or an automatic payment option with your service that allows bi-weekly payments.”
When you start making mortgage prepayments, it’s a good idea to follow up with your manager a few days later to make sure your extra payment has been received and processed appropriately, she said. declared.
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. Financing in Freehold, New Jersey. “If you have a low interest rate, like around 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 borrowthere’s no reason to let the bank sit on your money when you could invest it elsewhere and perhaps earn a better rate of return on your dollar, Jeanette said.
But if investment uncertainty is causing stress, it may be better to make accelerated mortgage payments, which provide a guaranteed rate of return on your money, even if your loan interest rate is lower. at 4%, Rueth said.
“If this is your best investment option, if you need a forced savings plan, or if you’re nearing retirement and getting rid of that mortgage is key to budgeting for your retirement goals, consider paying down your pre-mortgage,” she said.
— Erik J. Martin is a reporter for Three Creeks Media.
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