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. They come with no down payment requirement, no mortgage insurance, competitive interest rates, relaxed credit conditions and many more benefits.
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.
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.
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.
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:
Your lender can help you sort through your options for discount points when you're working through the VA loan process.
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.
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.
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.
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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