The VA loan provides veterans with 100% financing usually over a term of 30 years. What happens if the borrower wants to pay the loan off early though? Does the VA charge any prepayment penalties?
The good news is that there aren’t any penalties for paying your VA loan off early. You are free to pay it off whenever you see fit. If you have the funds, it may make sense to do so as you could save quite a bit of money on interest over the life of the loan.
Let’s take a look at how extra payments may help.
Paying the VA Loan Off Early
Let’s say you have a $150,000 VA loan with a 30-year term and a 4% interest rate. Your monthly payment would be $716. If you made just the required payments each month, you’d pay a total of $107,800 in interest.
Now, if you made extra payments on a regular basis, you might lower the interest you pay over the course of the loan. Let’s say for example you pay $100 extra per month for the life of the loan. Your 30-year term loan would suddenly be a 23 year and 10-month loan. You would also only pay $82,598 in interest. This is a savings of $25,000!
Now that’s if you consistently paid an extra $100 each month. Even if you paid that extra $100 a few times a year, though, you would save money on interest. Even just 5 extra $100 payments per year knocks off a little over one year off your loan’s term. It’ also saves you $5,000 in interest.
How to Pay Your VA Loan Off Early
You might wonder how you would even attempt to pay your loan off early. After all, you borrowed 100% of the home’s purchase price. Luckily, there are very simple ways, one of which we discussed above.
You can simply set a fixed amount you can afford each month and pay it with your mortgage payment. Like we showed above, just $100 extra per month can knock several years and thousands of dollars off your loan.
You can also make an extra entire mortgage payment each year. There are a few ways to do this:
- Pay one extra payment once per year when you know you’ll have the extra funds
- Pay 1/12th of your mortgage payment as an extra payment each month. At the end of the year, you’ll have made an extra payment.
- Make half of your total mortgage payment every other week. This turns out to 26 payments each year or 13 total mortgage payments per year.
Just that one extra mortgage payment each year can knock several years off your term and save you thousands of dollars in interest.
What are Prepayment Penalties?
Because the VA doesn’t charge prepayment penalties, it’s not something you have to worry about. However, it helps to know what it means so you understand the benefit of it. The penalty is assessed when a borrower pays the loan off in full prior to a specific date. Most penalties are no longer allowed, but if they are, they usually last for the first three years of the loan.
This means you cannot sell the home or pay off the loan within the first 3 years or you will pay a penalty. This used to be a way for a lender to ensure that he received enough interest from the borrower. VA loans and most other loans today, however, do not allow the penalty.
Prepayment penalties used to be something you really had to watch for when shopping for a loan. Today, however, it’s not a concern when shopping for a VA loan. Instead, focus on the APR and closing costs so that you can get yourself the best deal on your VA loan.