Recently friends of ours had the good fortune to inherit $50,000. This was unexpected money (very unexpected) and naturally one of the questions which arose was what to do with it.
There’s no problem spending $50,000. There are a lot of choices. But since this was a once-in-a-lifetime event was there some sensible way to use the money that would make a profound difference in our friend’s lives?
Rather than spend the money on a cruise overseas or a new truck, the lucky recipients instead elected to put money aside to offset some college costs, pay off some bills and fix up three older and inexpensive cars.
That meant there were still a few dollars left over, cash which has been set aside for emergencies.
Now more comfortable, our friends have a few extra dollars left over each month. One thing to do with spare funds is to start a mortgage prepayment program. Here’s how it can work for vets and military borrowers with VA financing.
VA loans give you the right to prepay in whole or in part at any time and without penalty. That means each month you can toss in a few extra dollars; by doing so you can substantially reduce your mortgage costs over time.
Here’s an example: You borrow $100,000 over 30 years (360 payments). There is a 3.5 percent fixed rate. Your monthly cost for principal and interest is $449.04.
If you held on to this loan for its entire term the full interest cost would be $61,654.
But let’s change things around. Say we set aside $50 a month and add it to the monthly payment. Now we’re paying $499.04 a month for principal and interest. At first $50 may feel like a lot but in time it becomes routine and money that somehow would have been spent or lost is now working for you.
- What was the impact of the $50 monthly pre-payment?
- The loan term is now down to 302 months from 360. Almost five years of payments have been eliminated.
- The potential interest cost for the entire loan has been reduced by more than $10,000 to $50,562. ($61,654 less $50,652)If the property is sold or refinanced before the end of the loan term less will be owed to the lender.
- It’s not hard to save $50 a month or whatever number is comfortable — you’ll be well on your way by just collecting change left on the dresser or setting one-dollar bills aside from your wallet each night.
Few people inherit $50,000 but anyone with a VA loan can start a pre-payment plan today. There’s no extra cost or set-up fee, just a careful look at the payment stub where it says you can add more principal. Do so on a regular basis and you can quickly create an effective home savings plan, one that produces real and visible benefits.
Photo courtesy Tax Credits