Pay Your Home Off Fast
Pay Your Home Off Fast!
Use Your VA Rate Reduction to Accelerate Your MortgageA lower interest rate does not have to mean spending the monthly savings. One powerful strategy is to refinance into the lower rate, continue making approximately the payment you were already comfortable making, and direct the difference toward principal.
When a VA refinance reduces your interest rate, the required monthly principal-and-interest payment may also decrease.
You could simply enjoy the lower payment.
Or, if it fits your budget, you can continue paying approximately what you were already accustomed to paying before the refinance.
The difference is applied toward principal, reducing the balance faster and reducing the amount of future interest charged on that balance.
A new 30-year refinance creates a new 30-year payment schedule.
But that does not mean you are required to take 30 years to pay it off.
VA-backed mortgages do not impose a VA prepayment penalty for paying additional principal or paying the mortgage off early.
By continuing to make a higher voluntary payment, you can use the lower refinance rate while maintaining or even accelerating the progress you had already made on your original mortgage.
How the Principal Snowball Works
Mortgage interest is calculated from the outstanding principal balance. When you pay extra principal, the balance becomes smaller sooner.
That means less interest accrues in future months. More of each later payment can then go toward principal, which reduces the balance again.
For illustration, assume the approximately $487,341 remaining balance is refinanced into a new 30-year fixed mortgage at 5%.
The new required principal-and-interest payment would be approximately:
Instead of spending that $381.60 monthly difference, assume the homeowner simply continues making approximately the old $2,997.75 payment.
That additional amount goes toward reducing principal faster.
Why Continuing the Old Payment Makes Such a Difference
| Strategy | Approximate Payment | Approximate Payoff | What Happens |
|---|---|---|---|
| Keep Original 6% Loan | $2,997.75 P&I | 28 more years after year 2 | Original mortgage finishes on its original 30-year schedule. |
| Refinance to 5% and Pay Minimum | About $2,616.15 P&I | 30 years after refinance | Lowest required payment in this example, but the new schedule would extend 32 years from the original purchase date if only minimum payments were made. |
| Refinance to 5% but Keep Old Payment | About $2,997.75 P&I | About 22 years 9 months after refinance | Approximately 24 years 9 months total from the original mortgage date - about 5 years 3 months faster than the original schedule. |
Refinancing can change the timing between payoff of the old mortgage and the first regularly scheduled payment on the new mortgage.
Depending on the closing date, there may be one or more calendar months in which you do not have your normal scheduled mortgage payment due.
Instead of treating that timing difference as spending money, you could set aside an amount equal to the mortgage payments you were already prepared to make and later apply that money toward principal.
These Are Not "Free" or Forgiven Mortgage Payments
VA specifically warns against advertising an IRRRL as providing one or two free or skipped mortgage payments.
Interest between payoff of the old mortgage and the beginning of the new payment schedule is still accounted for in the refinance.
The strategy described here is different: if your closing and first-payment dates create temporary cash-flow room, voluntarily save those dollars and use them to reduce principal rather than spending them.
Your old mortgage servicer may be holding money for property taxes and homeowners insurance in an escrow account.
When the old mortgage is paid off, the servicer reconciles that account. Any applicable remaining escrow balance under the servicer's control is generally returned after payoff under federal servicing rules.
A new escrow account may be established as part of the new mortgage for future property taxes and homeowners insurance.
Instead of spending an old escrow refund, a homeowner who wants to accelerate mortgage payoff could voluntarily apply some or all of the refund toward principal.
The amount of any escrow refund varies and cannot be guaranteed before the old account is finally reconciled.
For this illustration only, assume:
- Original loan was $500,000 at 6% for 30 years
- Approximately $487,341 remains after 24 regular payments
- The remaining balance is refinanced at 5% for a new 30-year term
- The homeowner continues paying the old $2,997.75 monthly P&I instead of the new approximately $2,616.15 minimum
- The refinance timing allows the homeowner to set aside the equivalent of two old mortgage payments rather than spending those funds
- The old escrow account later produces an illustrative $5,000 refund
- The homeowner applies both payment-equivalent amounts and the $5,000 escrow refund directly toward principal
Then assume the homeowner continues making approximately the old $2,997.75 principal-and-interest payment every month.
In the example above, approximately $519,900 of interest would remain after the first two years if the original 6% mortgage simply continued through its original schedule.
Under the illustrative 5% refinance strategy using the old payment amount plus the approximately $10,995 initial principal reduction, the remaining interest would be approximately $305,900.
That is a difference of roughly $214,000 in future interest in this simplified illustration before considering refinance closing costs, any financed VA funding fee, tax effects, changes in escrow, or other transaction expenses.
Use the Rate Reduction Instead of Letting It Disappear Into Your Budget
A monthly savings amount can look small when considered one month at a time.
But repeatedly applying that amount toward principal can create a very different long-term result.
Option 1: Keep the Savings
In the example, refinancing from 6% to 5% reduces required principal-and-interest by approximately $381.60 per month.
Keeping that savings increases monthly cash flow.
Option 2: Pay the Savings Back to Principal
Continue paying approximately the previous payment and voluntarily direct the difference toward principal.
This sacrifices some immediate monthly cash flow but can significantly accelerate payoff.
You Still Keep the Flexibility of the Lower Required Payment
One advantage of this approach is that the higher amount is voluntary.
In the $500,000 example, the required principal-and-interest payment after refinancing is approximately $2,616 rather than approximately $2,998.
If finances become tighter in a particular month, the borrower still has the lower contractual payment, subject to all normal loan terms. When finances permit, additional principal can resume.
Another Option: Refinance Directly Into a Shorter Term
Continuing the old payment on a new 30-year loan is not the only way to accelerate payoff.
Some Veterans choose a 20-year or 15-year refinance so the shorter payoff schedule is built directly into the required monthly payment.
30-Year With Voluntary Extra Principal
Provides a lower required payment while allowing you to voluntarily pay more when your budget allows.
15- or 20-Year Loan
Builds the faster repayment schedule directly into the required mortgage payment and can reduce long-term interest, but provides less payment flexibility.
A refinance replaces your mortgage, but it does not erase the equity you have already built.
If you have already spent two, five, or ten years paying your mortgage, we can look at more than simply the lowest possible new payment.
We can compare strategies designed to help you preserve the progress you have made and potentially become mortgage-free substantially sooner.
A Simple Payoff Strategy
Tell Your Servicer How You Want Extra Money Applied
When making an amount above the required mortgage payment, follow your servicer's instructions for making a principal-only or additional principal payment.
Review your following mortgage statement to make sure the extra amount was applied the way you intended.
The Refinance Itself Still Has to Make Financial Sense
Do not refinance solely because a new amortization example looks attractive.
Compare the new interest rate, closing costs, discount points, funding fee if applicable, new principal balance, remaining term, and the amount of time you expect to keep the mortgage.
VA IRRRLs are also subject to applicable seasoning, recoupment and net tangible benefit requirements.
Common Questions About Paying Your VA Mortgage Off Faster
Does refinancing mean I have to start another 30 years?
No. A new 30-year refinance establishes a new maximum amortization schedule, but you can voluntarily pay additional principal and pay the loan off much sooner. VA-backed mortgages do not impose a VA prepayment penalty simply because you pay principal early.
What happens if I keep making my old mortgage payment after refinancing?
If the new required payment is lower, the amount you voluntarily pay above the required payment can reduce principal faster when properly applied by the servicer. This can shorten the effective payoff period and reduce future interest.
In the $500,000 example, how much is saved each month?
The approximate principal-and-interest payment on a $500,000 30-year mortgage at 6% is $2,997.75. After 24 payments, the approximate remaining balance is $487,341. Refinancing that balance for 30 years at 5% produces an illustrative principal-and-interest payment of approximately $2,616.15, a difference of about $381.60 per month.
How much faster could that example be paid off?
If the borrower continues paying approximately $2,997.75 each month, the illustrative refinanced balance would be paid off in roughly 22 years and 9 months after the refinance. Including the first two years already paid, that is approximately 24 years and 9 months from the beginning of the original loan rather than 30 years.
Can I put my escrow refund toward principal?
Once an applicable old escrow balance is returned to you, you can choose how to use those funds. A homeowner whose goal is faster mortgage payoff may choose to apply some or all of the refund toward principal. The actual refund amount cannot be guaranteed in advance.
Do I really receive two free mortgage payments when I refinance?
No. A refinance can change when the first scheduled payment on the new mortgage becomes due, but those are not free or forgiven mortgage payments. Interest is still accounted for in the transaction. If the timing temporarily frees up cash that you otherwise expected to use for a mortgage payment, you can voluntarily save that money and later apply it toward principal.
Is the escrow refund part of the refinance cash proceeds?
No. The old escrow account contains money already being held on your behalf for property taxes and insurance. An applicable refund is the return of your remaining escrow funds after the old account is reconciled.
Can I make extra payments on a VA mortgage without a penalty?
VA-backed mortgages do not impose a VA penalty for paying the loan off early. Follow your servicer's instructions when making additional principal payments.
Is it better to refinance into a 15-year loan or use a 30-year loan and pay extra?
Both can accelerate payoff. A shorter contractual term generally creates a higher required monthly payment. A 30-year loan with voluntary extra principal can provide more monthly flexibility. We can compare the available rates, payments and total costs for both approaches.
What if I cannot afford the extra payment every month?
Additional principal payments are voluntary. The required monthly mortgage payment remains the contractual payment. You can adjust voluntary principal payments based on your financial circumstances.
Want to See How Fast You Could Pay Off Your Home?
Give VA Help Center your current mortgage balance, interest rate, monthly payment and remaining term. We can compare an available refinance with your current loan and show how continuing your existing payment or adding extra principal could affect your estimated payoff date.
CALCULATE MY FASTER PAYOFF Call 801-871-3739VA Help Center, LLC is a private mortgage company and is not affiliated with, endorsed by, or acting on behalf of the U.S. Department of Veterans Affairs or any other government agency.
All calculations on this page are hypothetical illustrations and are not loan quotes or guarantees. The $500,000 example assumes a 30-year fixed-rate mortgage at 6%, 24 regular principal-and-interest payments, refinancing the approximate remaining principal into a new 30-year mortgage at 5%, and excludes closing costs, financed funding fees, changes in taxes or insurance, and other transaction-specific amounts unless specifically stated.
The illustrative escrow refund of $5,000 is an example only. Actual escrow balances and refunds vary and cannot be guaranteed.
Refinancing may change the timing of scheduled mortgage payments, but mortgage payments are not free or forgiven. Interest is accounted for as part of the refinance. References to setting aside payment-equivalent amounts describe a voluntary budgeting strategy and are not a promise that a borrower will have two payments available.
Additional principal payments are voluntary and should be made according to the mortgage servicer's instructions. Actual payoff dates and interest savings depend on the loan balance, interest rate, payment amount, payment timing, closing costs, funding fee, servicing practices and other loan terms.
Refinancing may increase the total finance charges paid over the life of the loan. Borrowers should compare the existing mortgage with the proposed refinance before proceeding.