Prepayment penalties used to be common with any mortgage. Today, though, you can pay off most loans early, including the VA loan. The VA loan offers many benefits, such as no down payment and flexible guidelines, making it a great program for our veterans.
Does it Make Sense to Pay Off Your VA Loan Early?
Now that you know you won’t be penalized, you must determine if it makes sense to pay off your VA loan early. In most cases, it does make sense. After all, you can save a lot of money on interest.
When you pay extra money towards your mortgage, it pays down the principal. This means you hold the loan for a shorter amount of time. The decrease in time that you borrow the money decreases the amount of interest you pay.
Look at it this way. If you stretch the payments out over 30 years, you pay interest for the entire 30 years. If you pay the loan off in 25 years, you only pay interest for 25 years. That five years could make a tremendous difference in the amount of interest you pay.
How You Can Pay Off Your VA Loan Early
Now that you know it makes sense to pay your VA loan off early, how do you do it? Here are a few simple tips.
- Make a down payment – Even though the VA doesn’t require a down payment, you can still put one down. This helps reduce the amount you borrow. The less you borrow, the quicker you can pay the entire loan off.
- Pay extra towards the loan – You can pay more than the minimum required payment on your loan. If you have extra money every month or even once a year, put it towards the principal. This helps knock your loan down faster.
Here are a few ways you can make the most of your extra payments:
- Make one extra mortgage payment per year – Take your mortgage payment (principal and interest) and divide it by 12 months. This is the amount you should then pay extra towards your principal every month. This acts like a 13th payment for the year and can knock several years off your loan.
- Make an extra payment each month – If you can’t afford 1/12th of your mortgage payment every month, pay what you can. Even if it is just an extra $50 or $100, every little bit counts.
- Make a one-time payment each year – If you have any type of windfall, consider using it towards the mortgage. A few good examples are employment bonuses or tax refunds. Rather than spending it, put it towards your home investment. This can help knock your principal down.
Take Caution When Paying Your Loan Off Early
We have one word of caution when it comes to paying extra towards your mortgage. Make sure you aren’t taking money from your daily living expenses. Pay the rest of your bills first. If you still have money left, then you can put it towards the mortgage. If you get ahead of yourself and pay the mortgage first, you could leave yourself without money for your daily living expenses. This could end up causing you turmoil.
We recommend that you make a budget and stick to it every month. If you don’t have the extra money to spend yet, don’t worry. You are bound to come across some type of windfall or even a raise in the future. Only pay extra when you know you can truly afford it.
If you can afford to pay off your loan early, you’ll likely benefit. Paying less interest can help you make more on the investment you made in your home. Talk to your lender before paying extra towards your loan, though, to make sure they don’t have specific procedures you must follow.