VA Rate Buy Down
When borrowing money for any purpose, you want to do so at the lowest cost possible. And to get the lowest cost, you need a low interest rate and as few fees as possible. If you’ve decided on a VA loan and want to reduce your interest rate, you can do so through a process known as a VA loan rate buydown. What does that mean exactly, and when does it make sense? Let’s take a closer look.
What is a VA loan rate buydown?
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 $250,000, each point would cost you $2,500. Note, partial discount points are also usually an option, so half of a point in the above example would cost $1,250 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!
Are discount points worth it?
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 $32 per month and $12,455 over the course of your loan. How about two points? Buying two points under the same circumstances would save you $68 per month and $24,697 over the term.
If you have the extra cash up front, it can save you exponentially 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.
What is a temporary VA loan rate buydown?
Like a regular buydown, a temporary buydown requires an upfront deposit to lower the interest rate. However, it only reduces the rate for a limited time, rather than the entire duration of the loan term.
A common situation is the 2-1 temporary buydown where the APR 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 normal.
This can be helpful for buyers who want more affordable payments in the beginning. The VA prohibits lenders from paying fees and charges for temporary buydowns but the buyer and seller can pay them. Sellers sometimes offer this to entice buyers into the sale.
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!
VA loan rate buydowns 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.