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    VA loan points are the same as loan points on a conventional mortgage, but they may not be as advantageous as they may seem. The act of buying down points is one of reducing the amount of interest you pay. The general rule of thumb is that you can lower the interest rate by an estimated 0.25% for every 1% of the loan amount you pay up front. Reducing the interest rate is usually a strategic move as it can save a lot of money over the lifetime of the loan. In contrast, buying points on a VA loan winds up adding to the closing costs that are part of buying a home.

    VA loans don’t require a down payment, but if you decide to buy down points, you wind up paying more money at the origin of your mortgage than you otherwise would. You may wind up breaking even over the life of the mortgage as opposed to saving money. However, if you intend on staying in the home for a long period of time, buying points on a VA loan saves you money.

    The following guide will help you understand how buying VA points works, if you should consider buying down the interest rate on your VA mortgage, or if it’s better to take the interest rate that’s offered at the origination of the mortgage.

    KEY TAKEAWAYS

    • Buying VA loan points allows you to lower the interest rate on your loan in exchange for paying for points upfront.
    • VA loan points typically cost 1% of the purchase price of the home and each point reduces your interest rate by an estimated 0.25% or more.
    • VA loan points can lower monthly mortgage payments and potentially save borrowers money if they intend to stay in a home long-term, but may not be worth it if borrowers don’t plan to be in the home for long.

    What Are VA Loan Points?

    VA loan points, also known as discount points, are points you buy to lower the interest rate of the loan. While purchasing VA loan points will lower the loan’s interest rate, the upfront cost means you may have to stay in the home for a while for it to be worth it. Buying down VA points increases the closing costs due to the fact they have to be paid for by the time the contract closes.

    When it comes to the VA and loan points, the VA expects the lender and the borrower to honor any agreements they enter into when it comes to the discount points and their effect on the interest rate. The VA has no objection to changes in the interest rate through the purchase of points provided there are no violations in the lender and borrower agreements.

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    How Do VA Loan Points Work?

    VA loan points are purchased at the time you buy the home, and are based on the purchase price. For example, say you’re buying a house for $300,000 and you’re getting an interest rate of 5%. You want to lower the interest rate for the life of the loan, and, with some money freed up given that you don’t have to make a down payment, you want to buy VA loan points. The average purchase price for VA points is 1% of the purchase price of the home, which will in turn lower your mortgage’s interest rate by 0.25% or more.

    In this example, if you want to get the interest rate down to 4.5%, then you’ll have to pay $6,000 upfront and in cash to reduce the interest rate by 0.50%. This will make your monthly mortgage payment more affordable due to the reduced rate. But, at the same time, before buying points you may want to calculate how long you’ll need to stay in the home for that upfront payment of $6,000 to be worth it.

    The breakeven calculation is the following: The principal and interest payment on a $300,000 mortgage at 5% is $1,663.61/mo. The principal and interest payment on a $300,000 mortgage at 4.5% is $1,570.22. The difference in monthly payment is $93.39. $6,000 investment in points divided by $93.39 would take 64 months to breakeven. If you do not plan on refinancing or selling in the next 5 years it may be worth it to consider paying VA points.

    Benefits of Buying Down Points on a VA Loan

    There are good reasons to buy down points on a VA loan, especially if you have plans to stay in your home for the length of the mortgage and beyond. The benefits of buying down points include:

    • Paying less interest over the life of the loan.
    • Lower monthly payment.
    • Lower interest rate for a home you plan to live in for decades.
    • Potential for writing off the points on income taxes.
    • Potential to have the seller credit the cost of the buydown points at closing.

    Drawbacks of Buying Down Points on a VA Loan

    Buying down points also comes with drawbacks that can negatively impact your cash flow when buying a home. Some of the most notable drawbacks of buying VA loan points include:

    • Increased total VA loan closing costs.
    • Money can be lost if you need to move to a new area shortly after buying your home.
    • Residency has to be maintained for a longer period of time in order to benefit from the discounted interest rate.
    • May become ineligible for the 36-month break-even requirement to refinance your home.
    • If interest rates drop you may not benefit from a VA Streamline Refinance.
    • If you are not exempt from the VA funding fee it can get quite expensive to add points on top of that.

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    How to Buy Down Points on a VA Loan

    You have a few different options when it comes to buying down points on a VA loan. The most common option is to buy them from the lender, and this is done by asking the lender about the ability to buy discount points before closing. You and the lender can discuss the implications that come with buying discount points and if they’re a good idea or not.

    Another option is to ask the seller to pay for up to two discount points on your behalf, although the seller can’t pay for the points directly. As the VA permits the seller to pay up to 4% of the loan’s closing costs, you’ll need to make an arrangement with the seller around purchasing VA loan points.

    Remember that you can’t roll the cost of the discount points and loan fees into the financing, and that you have to pay for them upfront. However, if you’re doing a streamline or cash-out refinance, you can roll up to two discount points into the loan amount.

    On a VA Purchase Loan, you can either do a permanent buydown, a temporary 2-1 buydown mortgage, or no buydown points at all. It is always a good idea to run the numbers on all three options to see what is best for you and your unique situation.

    Calculating VA Loan Points

    The hands of a person holding a calculator over a table that has a clipboard with a document attached to it.

    As previously mentioned, a good way to estimate VA points is to use 1% of the purchase price of the home to get a 0.25% – .0375% reduction in the interest rate. In order to figure out how much you’ll need to buy down points, you can turn to a VA loan buydown points calculator. You can use the results to determine if you should buy down points or use your funds for other purposes.

    One of the details that you’re looking for is what’s known as a break-even point to determine if buying down loan points is a good idea or not. Using a VA loan points calculator can help show you how many months you’ll have to live in the home before you start seeing the savings show up from the lower interest rate. The formula takes your upfront cost for the points, your monthly payment, and how much you’ll save each month on that payment by lowering your interest rate.

    When to Purchase VA Loan Points

    Buying a home means taking several financial situations into consideration as you go through the purchase process. The following situations are ones you’re most likely to encounter as an active or retired member of the military, and practical ones that come with the long-term challenges of life.

    Long-term or short-term ownership

    In the event you’re planning on staying in the home past the break-even point, you can save money and keep your payment affordable through buying discount points. If you’re unsure of your ability to stay in the home before reaching the break-even point, buying down points on a VA loan may not make sense.

    You’ll save on interest over the life of the mortgage

    This is similar to your intended length of residency, but it affects your monthly payment by making it lower. Buying points may also enable you to pay off the mortgage sooner. Inflation erodes the value of the dollar over time, which means a lower monthly payment keeps an important cost stable and free from inflationary pressures.

    When interest rates are high

    VA loan rates are almost always lower than conventional mortgage rates due to the fact that VA loans are federally backed. However, if the interest rates are high, the interest on a VA loan is relative in that the rate can still feel high. Paying for VA points upfront has the effect of lowering both the interest rate and your monthly payment from the beginning.

    Frees up money

    Life can be expensive when least expected. Getting a lower interest rate serves to free up more money that you can put into saving for retirement, college funds, and any other savings goal over time.

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    Learn Whether VA Loan Points are Right For You

    Buying down points on a VA mortgage loan lowers the amount of interest you pay over the life of the loan. However, VA loan points make sense in certain situations, but not in others. They need to be paid upfront, can drain your cash reserves, and may not result in the savings you’re looking for if you’re in the home for a short period of time. On the other hand, you can save money and benefit from buying points depending on your long-term plans.

    At Griffin Funding, we can look at your homeownership plans and help you decide if you should buy down points or not. Our VA mortgage experts are here to answer your questions about the average credit score for VA loans, if you should put money down on the loan or not, and your refinancing options. Get in touch with us today to talk about getting a VA loan and what to expect from the process.

     

    Bill Lyons

    Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.