Can You Buy Points on a VA Loan? How to Lower Your Rate
What are VA loan points, and should I buy them?
These are important questions for homebuyers because they affect upfront and long-term borrowing costs.
Whether you should buy points depends on your long-term plans for your new home.
Check your VA home buying eligibility. Start here (Nov 23rd, 2024)What are VA loan points?
Buying a VA loan point — also known as a discount point or just a “point” — means you’re paying cash up front to lower the interest rate on your new home loan.
A VA loan point typically costs 1% of your loan amount. As a result, the cost of a point varies by the size of your home loan. One point on a $200,000 VA loan is $2,000 and two points equal $4,000. On a $250,000 loan, a single point would cost $2,500 while two points would cost $5,000.
Lenders use the term “discount point” because buying points discount the interest rate on a veteran’s home loan.
Check your VA mortgage rates. Start here (Nov 23rd, 2024)How to calculate VA loan points
Typically, buying one point lowers your interest rate by 0.25% for the life of the loan. The more points paid, the lower your interest rate.
With most lenders you can also buy fractions of discount points. You could find one-half, five-eighths and three-quarter point offerings, for example.
The more VA loan points you buy, the more money you’ll pay up front in closing costs. But more points also means less money spent throughout the loan term. It’s a trade-off.
Check your VA home buying eligibility. Start here (Nov 23rd, 2024)Are VA loan points worth it?
This is the key question when you’re thinking about buying VA loan points: Are the discount points worth the upfront money?
To answer that question, you’d need to know the future. You’d need to know how long you’ll stay in the home loan: Will you refinance or sell the home in a few years? Or will you keep the loan and pay it off on schedule?
There’s no way to know for sure; most Americans refinance or sell their homes before the loan term ends. The best you can do is base your decision on your current plans.
How soon do VA loan points pay off?
You’ll have to do your own math to find out when your discount points would pay off. But your situation may resemble the following example. It’s for a $200,000 home loan with a 30-year fixed rate.
In this example, we will assume you’re paying cash for the discount points since the VA doesn’t allow financing the price of discount points into home purchase loans:
| Discount points | Mortgage rate* | Upfront cost of discount points | Monthly payment** | Interest paid over life of the loan | Time needed to break even |
| 0 | 3.5% | $0 | $898 | $123,337 | N/A |
| 1 | 3.25% | $2,000 | $870 | $113,451 | 6 years |
| 2 | 3% | $4,000 | $843 | $103,601 | 6 years |
| 3 | 2.75% | $6,000 | $816 | $94,030 | 6 years, 1 mos |
| 4 | 2.5% | $8,000 | $790 | $84,530 | 6 years, 2 mos |
*the mortgage rate is for a hypothetical buyer; yours will likely be different
**payment does not include property taxes, home insurance, or other add-ons
As you can see, in this scenario, you’d need to make payments for six years for two discount points to pay off. If you refinanced this loan before its break-even point, your $4,000 in extra costs upfront wouldn’t have time to pay off.
To see the biggest impact of discount points, check out the “total interest paid” column. For example, with four discount points, you’d save $38,807 in interest if you stayed in the loan for its entire 30-year term.
Saving more than $38,000 is a pretty good return on your $8,000 investment. But you can cash in only by staying in the loan for its entire term. On average, most homeowners stay in their original loan for only about seven years.
Can you finance discount points into the loan?
The Department of Veterans Affairs requires homebuyers to pay for discount points in cash at closing. You cannot finance them into your loan amount.
However, it’s possible for the home seller to help pay for your discount points. The VA allows sellers to pay up to 4% of your home’s purchase price as VA loan closing costs. You’d need to negotiate this with the seller before going under contract.
If you’re refinancing, the VA lets you add up to 2 points into your loan amount as long as you can break even within three years.
How to calculate your own VA loan point savings
Examples like the ones above can help you understand how VA loan points create savings on a hypothetical loan. But what about your specific loan? How can you find your own break-even point?
A VA loan calculator can help you find your potential savings. Here’s how to do it:
- First, enter the rate and you’ve been quoted and your mortgage loan amount. Click “see results” and write down the monthly payment the calculator shows.
- Then, go back to the calculator and enter the lower rate you’d get with discount points. Click “see results” to calculate the new monthly payment size with the lower rate.
- Subtract the lower monthly payment from the original monthly payment to show your monthly savings generated by discount points.
- Divide the cost of your discount points by the monthly savings you found in Step 3. This answer will show the number of monthly mortgage payments you’d need to break even.
If you expect to stay in your home loan beyond the break-even point, your discount points should pay off. The longer you stay in the loan after your break-even point, the more you can save.
Check your VA mortgage rates. Start here (Nov 23rd, 2024)How to buy VA mortgage points
You buy discount points directly from your lender. Just tell your loan officer you’d like to buy VA loan points to lower your rate.
Experienced VA lenders will know the VA home loan program allows you to buy points even though the VA caps lending fees at 1%. VA loan points don’t count toward this 1% cap because they’re part of your annual percentage rate and not your lender’s administrative fees.
And, the lender can still charge its 1% origination fee even though you’re paying more for discount points.
Origination fee vs. discount points
The loan origination fee is a fee VA borrowers pay to the VA lender. It is usually expressed as a percentage of the loan amount, just like discount points.
But the loan origination fee does not directly lower your rate. The VA loan origination fee covers the lender’s expenses: Things like overhead, pay for employees, and otherwise keep the office running and continue to offer VA loans.
The most common amount of an origination fee is 1 percent. On a $200,000 VA loan that would be $2,000.
Lender fees can exceed 1 percent for other types of loans such as FHA and conventional loans. But the VA won’t allow lenders to charge veterans and military service members more than 1 percent.
The VA’s 1 percent cap includes other typical lending fees such as processing and underwriting fees. But, once again, this cap won’t affect your ability to buy discount points.
Check your VA home buying eligibility. Start here (Nov 23rd, 2024)VA Funding Fee vs VA loan points
VA loan points are an optional way to lower your long-term borrowing costs. But the VA requires borrowers to pay a VA Funding Fee upfront.
Most first-time homeowners pay a funding fee of 2.3 percent which would add $4,600 to a $200,000 loan. Repeat buyers may pay 3.6 percent. This fee can be rolled into your loan amount.
This funding fee takes the place of the mortgage insurance that other types of loans require. It helps the private lenders who issue VA loans to charge lower interest rates even when a veteran makes no down payment.
Check your VA mortgage rates. Start here (Nov 23rd, 2024)Down payment vs VA loan points
VA loans do not require down payments. But making a down payment can create advantages for new homeowners.
When you pay money down, you borrow less money for the same house. Borrowing less money in relation to the value of your home could lower your interest rate some.
So should you buy VA loan points or put that money down on your new home loan?
There’s no one-size-fits-all answer to this complex question. But, if you might sell or refinance the home within the first couple years, a down payment could be a better investment than putting that money into discount points.
Why? Because you could get the down payment money back when you sell or refinance. Once you’ve spent money on discount points, you can’t get that money back. Points pay off only when you’ve had enough time to benefit from the lower mortgage payments.
Discount points on a VA Streamline Refinance (IRRRL)
If you’re refinancing a current VA mortgage, then you’ll encounter the Interest Rate Reduction Refinance Loan, or IRRRL, commonly known as the VA streamline.
The VA streamline is a reduced documentation refinance program that requires no paycheck stubs, tax returns or employment verification.
Should points be used to lower an IRRRL rate? The same logic should be used as with the VA home purchase scenario. Divide the monthly savings into the additional upfront cost. If it takes longer than two to three years to recover the extra expense, it’s probably better to take the slightly higher rate.
The exception would be if you absolutely know you will not sell or refinance the house until it’s paid off. But it’s hard to be that certain. Most people sell or refinance within seven years.
Check your VA home buying eligibility. Start here (Nov 23rd, 2024)Rolling discount points into a refinancing loan
Unlike with purchase loans, the VA lets refinancing homeowners roll up to 2 discount points into the new loan amount. Doing this increases your loan size.
In the following example, a homeowner with a $200,000 loan balance is refinancing into a new 30-year fixed-rate loan. The homeowner is adding the cost of discount points to the loan amount:
| Discount points | Mortgage rate* | Extra principal from cost of points | Monthly payment** | Interest paid over life of the loan | Time needed to break even |
| 0 | 3.5% | $0 | $898 | $123,337 | N/A |
| 0.5 | 3.375% | $1,000 | $888 | $119,061 | 8 years, 4 mos |
| 1 | 3.25% | $2,000 | $879 | $114,510 | 8 years, 9 months |
| 1.5 | 3.125% | $3,000 | $869 | $110,066 | 8 years, 8 mos |
| 2 | 3% | $4,000 | $860 | $105,642 | 8 years, 8 mos |
*the mortgage rate is for a hypothetical buyer; yours will likely be different
**payment does not include property taxes, home insurance, or other add-ons
In the example above, the VA would not allow you to finance the cost of discount points because the break-even point extends beyond three years. But you could still buy down your rate by bringing cash to closing.
These rules apply to the VA cash-out refinance as well as the VA IRRRL. With the cash-out refi, you can finance up to 2 points into your new loan as long as the points don’t push your loan amount past the appraised value of your home.
Other ways to lower mortgage rates
With discount points, you’re buying down your interest rate, but you may not need to buy points if you already have a great interest rate. To get the best rate offers, be sure to:
- Shop around: Individual VA lenders have a lot of influence over the interest rate you pay. Getting Loan Estimates from at least three VA lenders can help you score a lower rate.
- Work on your credit score: Improving your credit report can take months or years, so it may be too late if you’re buying a home soon. But if you have time to pay down your credit card balances and establish a history of on-time debt payments before applying for a loan, you could access lower VA loan rates.
- Lower your DTI: Your debt-to-income ratio compares your existing debt burden to your monthly income. A lower DTI can help you get a lower interest rate. And, with no VA loan limits anymore, a lower DTI can qualify you for more expensive real estate purchases. You could lower your DTI by paying off a loan or two, or by asking for a raise.
Of course, you can still buy discount points even if you already have a rock-bottom rate offer.
Check your VA mortgage rates. Start here (Nov 23rd, 2024)Should you take a higher rate and receive a lender credit?
Just as lenders can lower an interest rate by charging the borrower a point, the lender may also do the opposite: raise the interest rate in exchange for giving the buyer money for closing costs.
To decide whether you should accept a higher mortgage rate in exchange for help with closing costs, you’ll need to do some more math.
For instance, a borrower could select a rate that’s 0.25% higher than market rates at the time. In exchange, the lender can offer a credit of, say, one point, to help pay for closing costs like the home appraisal, title insurance, and processing fees.
On a $200,000 mortgage, a borrower might receive $2,000 toward closing costs but pay $20 more per month on the new mortgage. This option could work well for homebuyers without enough money for closing costs.
Would you consider paying $20 more each month if you saved $2,000? Would you consider paying $2,000 to save $20 a month?
That’s how to evaluate claiming lender credits or paying points with a VA home loan. Determine how much you will save and how long it will take to save it.
Contact us today here or at (866) 240-3742 to find out about your VA purchase or refinance rate and point options.
Check your VA home buying eligibility. Start here (Nov 23rd, 2024)VA loan points FAQs
Can you buy down points on a VA loan?
Yes, the VA lets you buy down your mortgage rate through VA loan points, also known as discount points. You can’t finance the cost of discount points into your home purchase loan, but you could finance the cost of up to 2 points into a refinance loan.
Who pays VA discount points?
The buyer pays for discount points. You could ask for a seller to help, but the seller is not obligated. If you’d like the seller to help, ask your real estate agent to negotiate seller concessions into the home purchase contract.
Is the VA Funding Fee the same as points?
No. The VA Funding Fee resembles the private mortgage insurance (PMI) conventional loan borrowers pay or the FHA mortgage insurance premium (MIP) FHA borrowers pay. But unlike conventional or FHA loans, VA loans don’t require ongoing mortgage insurance — just the upfront VA Funding Fee.
How much do VA loan points cost?
The cost of VA loan points can vary a little by lender. In most cases, paying 1% of your loan amount will buy a 0.25% rate reduction. On a $200,000 loan, 1% equals $2,000.
How much does a discount point lower your rate?
Each discount point lowers your mortgage interest rate by 0.25%. At the same time, buying discount points raises your annual percentage rate (APR) because APR reflects the prepaid cost of discount points.
How many discount points can you charge on a VA loan?
The VA does not limit discount points. You can buy as many as your lender will sell you. However, the more points you buy, the bigger your upfront loan costs. If you sold or refinanced sooner than expected, you’d lose this upfront investment.
Do I qualify for a VA loan?
The VA loan program helps only military veterans, active-duty military service members, and some surviving spouses of deceased veterans. National Guard and Reservists can also qualify for this program if they meet the program’s length of service requirements. Qualifying borrowers must have a Certificate of Eligibility from the VA to apply for a VA loan. The VA insures these loans, but you’d apply for yours through a private lender that’s authorized by the VA.
*All scenarios assume a single-family residence, a final loan amount of $200,000 after the funding fee of 2.3% for purchase and .50% for IRRRL, and a 100% LTV. Final APR based on closing costs of $3,000, plus funding fee, plus stated origination fee or discount.
Check your VA mortgage rates. Start here (Nov 23rd, 2024)
