Most VA borrowers get 30-year loans. But, a 15-year VA mortgage can help military families build equity faster. And, with today’s low rates, switching from a 30-year to a 15-year mortgage may be more affordable than you think.
Lenders usually offer a lower interest rate for 15-year mortgages than for 30-year loans. If today’s average rate for 30-year mortgages is 4%, then a 15-year mortgage rate might be around 3.3% or even lower. VA-eligible borrowers are allowed to pay up to two points to receive the lowest rates.
Those with current 30-year loans may consider refinancing to a shorter-term mortgage while interest rates are as low as they are now. A 15- or 20-year VA-guaranteed loan may allow borrowers to pay off their loans in as much as half the time it might take with a 30-year loan.
Most 15- or 20-year loans likely have higher monthly payments than 30-year mortgages, but the reward for shorter-term borrowers is reduced interest rates. For instance, when shopping for a $250,000 home loan, a lender may offer two options that might look something like this:
• 30-year loan at 4.5% = $1,267 monthly or a total of $456,017 over time
• 15-year loan at 3.5% = $1,787 monthly or a total of $321,697 over time
With shorter-term mortgages, more of each monthly payment is applied toward the principal balance. This means faster equity and a faster track to debt-free homeownership. When looking at what’s paid over the life of the 15-year loan compared to the total payment of the 30-year loan, a small fortune can be saved. The total payment savings over time can make choosing 15-year mortgages a “no-brainer” for families who qualify.
Borrowers with current 30-year mortgages obtained when interest rates were higher may stand to benefit the most from a reduced term VA loan at today’s low rate. The impact of a higher monthly payment often associated with shorter-term loans may be significantly less. Consider this hypothetical refinance of a $250,000 loan balance:
• 30-year loan at 6% = $1,499 monthly or total of $539,595 over time
• 15-year loan at 3.5% = $1,787 monthly or total of $321,697 over time
(Taxes and insurance are not included in any of these examples)
A VA refinance from a 30- to a 15-year mortgage can save a bundle over time for families with enough income to afford the slightly higher monthly payments. Your VA loan professional can help you calculate a break-even point to make sure the costs to refinance justify the savings in a reasonable amount of time.
Other advantages to VA loans can include:
• Up to 100% loan-to-value
• No private mortgage insurance
• No prepayment penalties for early payoff
For more on reduced-term home financing, talk with an experienced VA loan professional.
Ashleigh Downing is the Social Media Director for iFreedom Direct. She has been working with and writing about veteran’s benefits and issues for the past three years.
iFreedom Direct is a top national VA lender that specializes in assisting active members and retired veterans of the Armed Forces with VA loans.