Just when you thought you know everything about VA loans, here’s another feature that works to your advantage. These home loans don’t have prepayment penalties!
This lack of prepayment penalties makes it perfect for you and other eligible VA borrowers to pay off your loan early and thus save on interest costs without worrying about any penalty fees for prepaying it.
VA loans are the true 0% down payment loans. Find out more about how you can take advantage of these loans here.
These fees compensate investors for bearing prepayment risks when a borrower pays off his/her loan before the end of the loan term. This effectively happens in a refinance or a sale of the property.
When the borrower refinances to get a lower rate, the investor that owns the mortgage loses money from payments that could have been higher if the borrower stuck with his/her mortgage rate.
To avoid this scenario, lenders set a timeframe where the borrower is not allowed to refinance or sell the home, or he/she will incur a penalty fee.
Prepayment penalties may also be triggered when the borrower pays off a sizeable chunk of the mortgage balance at once, or make extra payments to pay off the principal at a time.
Lenders have different ways of structuring their prepayment fees. Rest assured, you won’t be slapped with any prepayment penalty when you take out a VA loan.
Benefits of Prepaying Your VA Loan
You see, prepaying your VA loan is all for:
- Eliminating your mortgage debt faster. It’s a great opportunity to take when you plan to retire debt-free.
- Building equity faster. As your loan principal gets shaved off, you’ll pay less in interest costs.
Equity is very important when you refinance to take advantage of historically low rates via the Interest Rate Reduction Refinance Loan and consolidate debts using a cash-out refinance.
Both refinance programs from the VA offer easy qualifying process and benefits for homeowners like reduced monthly payments.
In the case of cash-out refinances, you can borrow up to 100% of your home value to pay off high-interest-rate credit card debts, fund home makeover projects, or send yourself or your child to university.
Make Those Extra Payments Count
As noted above, you can send extra payments every month or periodically to your loan servicer/lender.
If you are making extra payments, be sure to specify that they are for the loan balance. More importantly, don’t forget to make your regular monthly payments on time.
For fixed-year mortgages, the monthly payments would remain the same but a few years are knocked off the original loan term. As to adjustable-rate mortgages, the monthly payments change when the rate adjusts.
Keep track of these extra payments, record them in a notebook, and look for them in your end-of-year loan statement.
This goes without saying that making prepayments is a choice, a viable option when your budget permits it. But, having no prepayment penalties is definitely one less worry when deciding about the future of your mortgage.