How Discount Mortgage Points Work on a VA Loan
Purchasing discount points on a VA loan can be a good investment for Veterans looking to lower their interest rate.
VA loans are generally one of the most affordable options for Veterans who are looking to buy a home or refinance their mortgage. VA mortgage benefits include no down payment requirement, no mortgage insurance, competitive interest rates, relaxed credit conditions, and more.
No matter how affordable your loan is though, buying a home is still expensive. If you have the flexibility to put more money down up front, then VA loan discount points may be a great way to bring down your monthly payment and make your loan more affordable in the long run.
What Are Discount Mortgage Points on a VA Loan?
Discount points are an upfront fee you pay on a loan in exchange for a lower interest rate. Typically, one discount point costs 1% of the total loan amount and lowers your interest rate by 0.25%. That lower rate will not only bring down your monthly payment, but will also reduce your total interest paid if you hold onto the loan for long enough.
How Many Discount Points Can I Buy?
Discount points can pay off in the long run with your VA loan. The more points you buy up front, the more you'll lower your monthly payment and reduce your total interest. If you're able to buy more points, it may be a smart move.
Technically, there are no VA max discount points for such loans. However, the exact number of points you can buy is ultimately up to the lender handling your VA loan. Most lenders won't allow you to buy more than 4 points.
If you're refinancing with a VA Interest Rate Reduction Refinance Loan (IRRRL), you can't roll more than 2 points into your loan.
How VA Discount Points Work
In general, VA loan discount points work the same way as they would on any other loan. There are a few key aspects unique to VA loans, though:
- You can't roll any points into a VA loan for a new home purchase, which means you'll need to come up with the cash for all discount points up front.
- If you can't afford the points up front, you can consider asking for a seller concession. Although the seller can't technically pay for your VA discount points, they can pay you up to 4% of the purchase price in concessions, which can free up cash for you to buy points.
- You can roll up to 2 points, along with any other closing costs, into a VA IRRRL if the total loan amount is worth no more than 90% of the home's value. You'll need to be able to recoup your total closing costs in 36 months or less.
Your lender can help you sort through your options for discount points when you're working through the VA loan process.
Is Purchasing VA Loan Points a Good Idea?
VA mortgage points can come with major benefits, especially over the life of a 30-year loan. However, as with any mortgage, it's only worth buying points if you'll save more in the long run than you spend upfront. That means you need to keep the loan long enough for the savings from your lower monthly payment to exceed what you paid for the points.
How to Calculate Discount Points on a VA Mortgage
Say you're preapproved for a 30-year VA loan of $250,000 at 5% and you buy 2 discount points. Again, those points usually cost 1% of your loan and lower your rate by 0.25%. In this case, 2 points would cost $5,000 and bring your rate down to 4.5%. That small-rate change would change your monthly payment (principal and interest) from $1,342 to $1,266 and save you $26,864 in interest over the 30-year life of the loan.
To decide if it's worth it, you'd want to be sure you kept the loan long enough to recoup that $5,000. Since you're saving $76 per month ($1,342 minus $1,266), it will take you 66 months (five and a half years) to break even on those discount points. If you don't plan to refinance or move before then, it's probably worth it.
Pros and Cons of Purchasing VA Discount Points
Even if the break-even point looks good, there are other pros and cons of VA loan points to consider before you make your final decision.
Pros
- You'll lower your monthly payment and put less stress on your monthly budget.
- Points get you a lower interest rate, which can save you substantially if you keep the loan long enough.
- If you itemize your deductions, you may be able to deduct your points on your income taxes if they were used to buy or build your primary home.
- You may be able to limit the upfront cost of points by rolling them into your loan or seeking seller concessions.
Cons
- Your closing costs will go up.
- You'll need to stay in your home long enough to recoup the costs, which can be especially uncertain for military families that relocate frequently.
- If interest rates are already low, the points may not be worth it.
- If you don't itemize your deductions, you'll miss out on the potential tax savings.
Are VA Loan Discount Points Right for You?
VA loan points can be a great way to lower your monthly payment and save money in the long run, but it's important to weigh the benefits and disadvantages before you decide. Comparing the upfront costs to your potential long-term savings will help you make sure that lower rate is worth it.
If you're unsure whether it makes sense to purchase discount points for your VA loan, reach out to our team today. We'll help you get the VA loan terms that make sense for you.
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