If you’re looking to lower monthly payments on your VA home loan, discount points can be a great option. A discount point, otherwise known as a mortgage point, is an upfront fee you can pay to reduce your interest rate over the life of your VA loan.
There are potential advantages and disadvantages to buying down your rate that we’ll explore further in this guide.
A VA discount point typically costs 1% of the total loan amount and lowers your interest rate by 0.25%. For example, one discount point would cost $2,500 on a $250,000 loan.
A discount point is a percentage of your VA loan amount and the more cash you can put down upfront, the lower your interest rate and monthly mortgage payment will be.
It’s important to note points don’t always have to be round numbers. It’s also possible to purchase “partial points.” For example, if you cannot afford a full point on a $250,000 loan, you could purchase a half point for $1,250, lowering your interest rate by 0.125%.
The VA does not allow you to roll the cost of discount points into the purchase of a new home. You’ll need to come up with the cash upfront if you want to use points to buy down your rate.
While the seller can’t directly pay for your VA loan points, it is possible to have your closing costs paid as part of the seller concessions. The VA allows sellers to pay up to 4% of the loan amount toward closing costs. This would potentially free up cash that you could use toward buying points.
If you’re taking advantage of a VA Interest Rate Reduction Refinance Loan (IRRRL), the VA allows you to roll up to two discount points into the loan. The catch is that you must recoup the costs of the refinance, including any fees and closing costs, within 36 months.
VA Discount Points for VA Cash-Out Refinances
Unlike a new home purchase, it’s possible to roll discount points into a VA cash-out refinance. You’ll still need to be able to break even on the costs of the loan within 36 months and your loan-to-value ratio cannot exceed 90%.
Let’s break down how to calculate discount points through a quick example. Say you’re preapproved for a $250,000 30-year fixed-rate VA loan at 6%. Your lender offers you an interest rate of 5.5% if you buy two discount points at the cost of $2500 each, $5000 total.
At an interest rate of 6%, your monthly mortgage payment, including property taxes and homeowners insurance, would be approximately $1822 per month. Bringing the interest rate down to 5.5% would lower your monthly payment to $1742 per month, saving you an estimated $28,880 in interest over the life of your 30-year mortgage.
See how much you might be able to save each month on your own mortgage payment using our VA Mortgage Calculator.
While buying points can save VA borrowers thousands of dollars over the long term, it may not be the best choice for everyone.
Using the same example from above, purchasing two mortgage points for a total of $5000 lowers the monthly mortgage payment $80 per month ($1822 minus $1742). That means it would take around 63 months ($5000 divided by $80), or a little over five years, to break even on the cost of those points.
If you’re not planning to move or refinance the home before your calculated breakeven point, buying VA loan points is likely a good financial decision.
The VA does not limit the number of discount points you can purchase, but most lenders will not allow you to purchase more than four points.
No, discount points are separate from the VA funding fee. Ranging from 1.25% to 3.3% of your loan amount, the VA funding fee goes directly toward supporting the VA loan program for future generations.
All in all, purchasing points on a VA loan can be a great option for some and a bad choice for the others. At the end of the day, it all comes down to what the points will do for you over the life of the loan and if it makes financial sense.