Buy Down Points on VA Loan
In a stable interest rate market, buying down points on a VA loan is a common question. To answer the question and make a decision regarding the benefits to you as a borrower is a pretty simple cost / benefit analysis – just math.
In a rapidly rising interest rate market, the questions about 2-1 buydown VA loan are much more about “up front” payment affordability, not about recouping the investment of buying down a lower rate for the long haul. The 2-1 buydown for a VA loan is also known as a VA temporary buydown.
If you’re going to get a VA loan, and want to reduce your interest rate, either way, permanent or temporary, buying down the interest rate on a VA loan might make sense. Let’s take a closer look at both results.
What is a VA loan rate buydown?
Watch this video for am easy explanation of all types of VA loan buydowns!
In the more common and permanent version, a VA loan rate buydown is when you pay for discount points that reduce your mortgage interest rate. As a result, your monthly payment amount and total loan cost is reduced.
These points are paid during closing and typically each discount point lowers your rate by 0.25%. The cost of each point is usually 1% of the loan amount.
So if you are getting a mortgage of $500,000, each point would cost you $5,000. Note, partial discount points are also usually an option, so half of a point in the above example would cost $2,500 but it would only lower your rate by 0.125%.
You can use our mortgage loan payment calculator to figure out how much a rate reduction can save you!
Buying Down with Discount Points on a VA Loan
Are discount points worth it? On a loan amount of $500,000, if you were to pay one point at closing and your APR was 3.5%, you would lower it to 3.25%. This could save you about $69 per month and $24,909 over the course of your loan. How about two points? Double the values – simple math…simple decisions, right?
If you have the extra cash up front, it can save you a lot of money in the long run – that is, if you plan to live in your house for many years to come. If you, like many people today, only plan to live in your house for five to 10 years or plan to refinance, you may not have enough time to recoup your costs and earn significant savings.
We have discovered that most of our clients do not stay in the loan long enough to recoup the costs. If you’re going to pay for the low rates, be certain in your decision!
What is a temporary VA loan rate buydown?
Like a regular buydown, a temporary buydown requires an upfront fee or points to lower the interest rate. However, it only reduces the rate for a limited time, rather than the entire duration of the loan term.
2-1 Buydown VA Loan
When rates rise rapidly, calls to VA lenders about 2-1 buydowns start to pour in! Why? This VA temporary buydown provides a lower rate for the first two years, stair stepping up to the permanent rate on year three. The result is a more affordable payment in the first two years!
This less common buydown is where the interest rate is bought down for the first two years. The first year by 2% and the second year by 1%. So if you get an APR of 4.5%, the first year it would be reduced to 2.5% and the second year to 3.5%. Then, it would return to 4.50% for the next 28 years. This relationship is not always a given so call us at 949-268-7742 for current rates on the buydown.
Still have questions? You can find many answers to frequently asked VA loan questions in our FAQ section.
Find support for all your VA loan needs!
Buying down your interest rate on a VA loan can be the right solution in certain situations. If you would like to get professional advice, call 949-268-7742 to speak with a Sr. VA Loan Technician at SoCal VA Homes today! We’re happy to walk you through the numbers to find the best plan for your unique scenario.