People with most types of mortgages, including borrowers with home loans backed by the Department of Veterans Affairs, can save tens of thousands of dollars by accelerating their mortgage payments.
That means a borrower pays more than owed for their monthly payment, or adds an extra payment annually or at a different interval, with the balance applied toward principal. It’s also known as prepaying a mortgage.
Consider that your VA loan consists of two parts: the principal balance -- the amount you originally borrowed to purchase 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’re accelerating the repayment of your principal,” said Chuck Vander Stelt, 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 payment, the interest expense will be less than what was scheduled to be received in your mortgage amortization chart.”
In other words, the amount of interest that accrues is reduced when you decrease the amount you owe. Plus, prepaying your mortgage reduces your loan’s length, thereby reducing the number of months over which interest can accrue.
Case in point: Say you purchase a home with a VA loan for which you borrow $300,000 at a 3% fixed interest rate over 30 years.
“If you pay an extra $100 every month applied to your principal, you will end up paying off your mortgage three years earlier than normal and save around $20,000 in interest,” said Nicole Rueth, senior vice president with Fairway Independent Mortgage Corporation in Englewood, Colorado.
Note that federal regulations on mortgages allow homeowners with a VA loan to pay off their home early without any prepayment penalties or fees.
There are three commonly used accelerated payment strategies you can pursue:
Strategy 1: Pay a little more each month. As with the previous example, paying $100 extra every month -- or an amount that’s comfortable to you -- can shorten your loan’s life and save thousands of dollars in interest.
“You just need to make sure you indicate to your lender or loan servicer that any extra money you designate gets applied to your principal and is applied to your loan immediately,” Vander Stelt said.
You can do this by contacting the company that services your loan -- the name on the monthly bills you get -- and asking how they would prefer to receive the extra monthly payment.
Strategy 2: Make biweekly payments. Instead of paying one large monthly payment or a separate extra payment each month, why not pay half of your total monthly payment every other week?
“Since there are 26 bi-weekly periods per year, this equates to a full extra payment toward your principal each year,” said Julie Aragon, CEO and founder of the Los Angeles-based Aragon Lending Team.
For a 25-year VA loan of $250,000 at 3.75% interest, for instance, you would pay $642.66 every other week, resulting in early repayment of 2 years, 11 months and a total savings of $17,789.71 in interest, she said.
Again, it’s best to consult your loan servicer on how to execute this strategy effectively.
Strategy 3: Make a 13th payment. Instead of making 12 payments annually, make one extra payment a year at a time of your choosing for a total of 13 mortgage payments. Put another way, make two full mortgage payments during one month of your choice each year.
“Using this strategy, if you have a mortgage balance of $300,000 on a 30-year term with a 4% interest rate, you will pay off your home 50 months early and save over $34,000 in interest payments,” Vander Stelt said.
“While there is no specific timing as to when it’s best to make this extra payment, it’s wise to make it consistently in the same month each year. Tax return time could be a great period in which to do this,” he said, referring to the refund some taxpayers get.
There are several ways you can set up extra mortgage payments. Often, a servicer will request that you mail a separate check to them and indicate in the memo field that you want these funds to be applied toward your principal, with a note of instruction attached. Alternatively, you may be able to make an extra payment by phone.
“You may also be able to set up an electronic funds transfer that rounds up your auto payment or adds to your check each month,” said Rueth, of Fairway. “Or you may be allowed to sign up for a bimonthly payment service or an auto-pay option with your servicer that enables biweekly payments.”
When you first begin making mortgage prepayments, it’s a smart idea to follow up with your servicer 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 for making accelerated mortgage payments than others.
“The real answer as to whether it’s worth it to prepay your VA mortgage loan is based upon two factors: your current interest rate on the mortgage 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, such as near 3%, it may make more sense to invest your extra funds into a vehicle that can earn greater than that rate of interest.”
This could be your retirement fund, additional real-estate investments or even the stock market, he said. With money being so cheap to borrow, there is no reason to let the bank sit on your money when you could invest it elsewhere and perhaps earn a greater rate of return on your dollar, Jeanette said.
But if investing uncertainty will cause stress, it may be better to make accelerated mortgage payments, which offers a guaranteed rate of return on your money -- even if your loan’s interest rate is below 4%, Rueth said.
“If this is your best investment option, if you need a forced savings plan or if you are nearing retirement and getting rid of this mortgage is key to budgeting your retirement goals, consider prepaying your mortgage,” she said.
-- Erik J. Martin is a reporter for Three Creeks Media.
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