Paying Discount Points for lower VA Home Loan Rates
When you pay discount points to get a lower VA loan rate, you will save money on your monthly mortgage payment. Here, we’ll take a closer look at what exactly discount points are and how to figure out if you should choose the rate that requires “paying points.”
What are discount points on a VA loan?
Discount points present a way for you to reduce the interest rate on your VA loan. One discount point is equal to one percent of the loan amount and generally reduces your NOTE rate or interest rate by 0.25% (25 basis points).
Let’s look at an example.
Jon applies for a $280,000, 30-year fixed VA loan and gets approved for a 3.440% annual percentage rate (APR). Jon’s lender tells him he can pay 1% of the loan amount upfront to receive 0.25% off of his interest rate for the remainder of his loan.
One percent of the loan amount amounts to $2,800. The question is, how much will that discount point save Jon?
With a 3.440% APR, the mortgage will cost him approximately $564,908 over the 30-year term. A 3.19% APR will bring the cost down to $551,016 over the 30 years for a savings of $13,892 overall.
So, Jon can pay $2,800 upfront and save $13,892 over the 30-year mortgage.
The monthly savings amounts to $38.59. For Jon to break even on his discount point investment, he will need to make about 73 monthly payments (six years and one month).
Is it better to pay points for a lower mortgage rate?
Paying points to lower your mortgage rate offers a sizeable return on investment if you keep your loan for the full term. In the example above, Jon saved almost five times his investment!
However, the savings are reduced if you don’t keep your home for the full mortgage term. For example, if Jon decides to sell or refinance his house after five years, he would not have saved any money and would actually lose $484.
So, whether or not it’s better to pay points for a lower mortgage rate depends on how long you plan to stay in the house with the same mortgage.
How-to figure out if VA loans rates with discount points are worth it
You can use our VA loan calculator to run the numbers for your situation. Follow these steps:
- Enter your loan information including the original interest rate offered to you.
- Take note of the total cost and monthly payment.
- Then change the interest rate to the discounted VA loan rate and take note of the total cost and the new monthly payment.
- Compute the difference in total costs and monthly payments.
- Divide the cost of the discount point(s) by the monthly payment savings to find how long it will take to break even.
- Decide if you think you will stay long enough for discount points to pay off.
Who pays the discount points on a VA loan?
Per the VA lender’s handbook, which provides underwriting guidelines for all VA loans, when achieving a lower VA loan rate with discount points, the points on a VA loan can be paid by the borrower, the seller, the lender or any other party on behalf of the buyer. There are very few circumstances when the lender will offer to pay them. Be cautious about paying them yourself in cash. The best alternative is to negotiate with the seller to pay the discount points for you in a purchase transaction. That result can provide sizeable savings.
Do I have to pay VA loan discount points upfront in cash?
Discount points must usually be paid upfront, in cash on a new VA loan. However, if you are refinancing your VA loan, you will likely be able to roll the cost of the discount points into the loan by simply increasing the loan balance.
The most common VA refinance program that allows you to roll discount points into the loan to get a lower rate is the VA streamline refinance loan, aka, the Interest Rate Reduction Refinancing Loan or IRRRL
While adding the cost of the loan with discount points will increase the amount you borrow, it splits the cost up over time and enables you to start saving right away. Using the example above, if Jon refinanced to a new VA loan balance of a $282,800, with $2,800 rolled in and got the reduced APR of 3.19%, he would start saving $26.50 in his first month but would only save $9,538 overall ($4,353 less than if he had paid the discount points upfront, in cash).
So, you may not have to pay the VA loan discount points upfront when refinancing a VA loan, and they can help you save right away. However, doing so significantly decreases your overall savings when compared to paying the point upfront in cash.
Get expert advice on VA loans and discount points
Do you want to talk to an expert about VA Loan rates with discount points to figure out if it’s the best move for you? Call 949-268-7742 to speak with one of our Sr. VA Loan Technicians today for the best guidance!