Many circumstances can lead a borrower to consider paying off their mortgage ahead of schedule. However, prepayment penalties can often limit this option by requiring the borrower to pay a fee if the loan is paid off early.
VA loans are unique in that they have no prepayment penalties, allowing you to make the best choice on your terms. However, that doesn't mean paying off your loan as quickly as possible is always the best option. If you want to pay off your loan early, consider how it might affect your overall financial profile before moving forward.
How many months ahead can you make a VA mortgage payment?
There is no limit to how early you can pay off your VA loan. With other loan types, you may be discouraged by prepayment penalties from paying off too much of your loan within a few years.
Pros of Paying Off a Mortgage Early
From more peace of mind to eliminating considerable debt, paying off your VA loan early comes with many immediate and long-term benefits.
Full Homeownership Feels Great
The subjective feeling of pride and accomplishment gained from paying off your VA loan cannot be overstated. There's a huge emotional component attached to property ownership. Owning a home is a lifelong dream to many, and achieving that can feel more amazing than words can explain.
Financial Freedom
Once you've paid off your VA loan, you've eliminated a substantial financial obligation. During the mortgage's lifespan, compounded interest grows to a large amount alongside the original principal balance. Paying off your mortgage early means less worry and less debt.
Restoration of Entitlement
Your entitlement benefits will be restored as soon as you repay your VA loan. While other factors are at play, restoring your entitlement is the first step towards purchasing your next house with a new VA loan.
You're Conservative With Investing
If you're unsure about making risky investments, then paying off your VA loan early is a great alternative that will help your money grow. Paying off your mortgage means those interest rate payments will be absolved from your monthly expenses, helping you save for significant life events like retirement.
Preparing For Retirement
Speaking of retirement, if there are five years left on your mortgage, it makes sense to pay off your loan quickly. Especially if you can live comfortably off social security, paying off as much debt as possible makes sense. Ensuring you have a 401(k) or pension plan in place can also supplement your retirement needs.
Cons of Paying Off a Mortgage Early
Even though VA loans don't have prepayment penalties, paying off your mortgage with a large lump sum of money has other financial implications you should consider before making your decision.
Prioritize High-Interest Debt
If you have a lot of high-interest debt, like credit cards or other loan types, consider paying that off first before turning to your VA loan. Money owed on a credit card or auto loan will technically cost you more in the end due to higher interest rates. Debt on something with a faster depreciating value should be paid off before a mortgage.
While getting one financial obligation off your plate may feel good, high-interest debt will continue to grow quickly, so prioritize paying off those items first.
Consistent Mortgage Payments Improve Credit
Making consistent mortgage payments can also help improve your credit over time. While your credit may take a slight dip when you first take on the loan, paying on time each month shows that you are a reliable borrower. Especially if your interest rate is low, you should consider whether building your credit score is a better long-term option.
Tax Deductions
To complement low interest rates, mortgage holders receive tax deductions on their mortgage interest rates. For example, someone in the 25 percent tax bracket ($35,351 - $85,650 annual income) with a 4 percent interest rate will have around a 3 percent after-tax rate. You will only be eligible for these deductions if you have a mortgage payment.
You Need an Emergency Fund
Also, consider following a regular payment plan if you still need to secure emergency funds. Life happens, and it's essential to be ready for financial crises. Most experts recommend 3 to 6 months of salary to cover unexpected circumstances.
Paying the monthly minimum on your VA loan allows you to build an adequate emergency fund. Money in savings accounts is liquid, while money tied up in home equity is not. You may be pressured to use high-interest credit cards if you don't have proper emergency funds. If you want to be more prepared for the unpredictable, consider prioritizing liquid savings over a paid-off VA loan.
The Bottom Line
If you want lower interest rates and need to pay off high-priority debt, consider a VA Cash-out Refinance. The cash-out refinance allows homeowners to take money out of their home equity and invest it. Veterans can refinance from a traditional mortgage into a VA loan. A cash-out refinance means more debt but also "good" debt well invested.
Only you know your current personal and financial situation. Your interest rates, income security, other debt and age all factor into the early mortgage payment equation. If you have any mortgage-related questions, consult one of our Veterans United VA Loan Experts by calling 1-800-884-5560.
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