Do You Pay Points on a VA Loan?

Points can lower your interest rate. How much can you save with discount points?

Veteran with family sitting on the stepsIf you're a veteran of the armed forces, or the spouse of a veteran, you may be eligible for a VA home loan. But what are VA loans, and do you have to pay mortgage points on them when you buy a home?

VA loans are mortgages that are backed by the U.S. Department of Veterans Affairs. They're available to eligible veterans, active-duty service members, reservists, National Guard members, and certain spouses of veterans.

What Are Discount Points on a VA Home Loan?

Discount points are a type of prepaid interest that allows veterans to buy down their mortgage rate. By paying discount points, veterans can lower their monthly mortgage payment and save money over the life of their loan. Veterans can use discount points to buy down their interest rate to as low as 0.5% below the standard VA loan rate. Discount points can also be used to buy down the origination fee on a VA loan.

Do You Have to Pay Points on a VA Loan?

There's a lot of misinformation out there about VA loans, and one of the most common misconceptions is that you have to pay “points” in order to get one. That's simply not true!

VA loans are available to eligible veterans and service members, and they provide a number of benefits, including no down payment and no monthly mortgage insurance. One of the best things about VA loans is that they don't require the borrower to pay any points upfront.

What are points? Points are a form of prepaid interest, and they're typically charged by lenders in order to lower the interest rate on a loan. One point equals one percent of the loan amount. So, on a $200,000 loan, one point would cost $2,000.

Charging points is optional for lenders, and many choose not to do so on VA loans. That means that you can get a VA loan without paying any points!

If you do decide to pay points on a VA loan, you can either pay them upfront or finance them into the loan. Financing points into the loan will increase your borrowing costs, but it can also help to lower your interest rate.

No matter what, make sure you shop around and compare offers from multiple lenders before making a decision. And remember, you don't have to pay points on a VA loan!

How to Calculate Discount Points on a VA Mortgage?

When it comes to taking out a mortgage, there are a lot of factors to consider. One of those factors is discount points. But what are discount points, and how do you calculate them?

Discount points are a one-time fee that you can pay at closing in order to lower your interest rate. One point is equal to one percent of your loan amount.

According to the VA, “loans insured by the VA may allow veterans to pay discount points at a fair rate. Whatever the borrower and lender decide upon for the total number of discount points will be applied. If the VA funding fee is going to be paid out of the proceeds of the loan, then discount points may be calculated based on the principal amount of the loan after the funding charge has been included”. The word "may" can cause a miscalculation, so for the following example we'll include the VA funding fee. Some lenders "may" make their calculation on the base loan without including the funding fee.

Currently, a first time home borrower pays a funding fee of 2.3%. Here's the math.

Sales price = $200,000

Less down payment -0-

Loan amount = $200,000

Funding fee = $4,600 ($200,000 X 2.3%)

Final loan amount = $204,600 (the funding fee is financed)

Discount point cost = $204,600 X 1% = $2,046 (assumes one discount point)

So, if you're taking out a $200,000 loan, one point would cost you $2,046.

The amount of interest points you pay will affect how much your monthly payments will be, as well as the total amount of interest you'll pay over the life of the loan. So it's important to calculate how much paying points will cost you in both the short and long run.

To calculate the monthly savings from discount points, you'll need to know your loan's interest rate, both with and without points. Let's say your loan's interest rate without points is 4.5%, and with points it's 4.25%. To get your monthly savings, you would take 4.5% and subtract 4.25%. This would equal 0.25%. To calculate your monthly savings, you would take 0.25% of your loan amount and multiply it by your loan term (in months). So, on a $100,000 loan with a 30-year term, your monthly savings would be $62.50.

To calculate the total savings from discount points, you would take the monthly savings and multiply it by the number of months in your loan term. So, on the same $200,000 loan with a 30-year term, your total savings would be $18,750.

Do You Pay Interest on a VA Loan?

Mortgage interest graphicDo you pay interest on a VA loan? The answer is yes, but there are some key things to know about how VA loans work.

First, the VA does not actually lend money for VA loans. The VA simply guarantees a portion of the loan, which allows lenders to offer more favorable terms to VA loan borrowers.

Second, because the VA guarantees a portion of the loan, lenders are able to offer lower interest rates to VA loan borrowers. In fact, VA loan rates are often some of the lowest available.

Third, you may be able to finance your entire VA loan amount, plus any closing costs. This is called a VA no-money-down loan.

Finally, you will pay interest on your VA loan, but you may be able to include the cost of the interest in your loan amount. This is called a VA funding fee.

If you have any questions about VA loans, or if you want to learn more about how they work, please contact a VA loan expert.

How Do You Pay Points on a VA Mortgage?

The process of paying points on a mortgage is fairly straightforward, in case you were wondering how to go about doing so. You will be required to pay the points associated with your mortgage at closing, with the other closing costs. One point is equivalent to one percent of the total amount you are borrowing. Therefore, if you are taking out a loan for $200,000, one point will set you back $2,000 to $2,046.

It is possible for the home seller to pay the discount points on the buyer's behalf, which will result in less cash being required at closing.

It is important that the agreement to pay the discount points be included into the sales contract if the seller intends to offer this concession.

Mortgage discount points can not be rolled into the mortgage, unless the borrower is refinancing their current loan.


How Many Discount Points Can You Charge on a VA Loan?

Man counting with his fingersVA loans do not have a discount point cap. However, the mortgage lender that is handling your mortgage loan ultimately decides the number of points that you are allowed to purchase. The majority of lenders won't let you purchase more than 4 points at a time.

Is It Good to Pay Points on a VA Mortgage?

When it comes to a VA mortgage, the question whether or not it is good to pay points may come up. There is no simple answer to this question, as there are a number of factors to consider. However, in general, points on a VA mortgage can be a good idea if it lowers your interest rate.

Of course, you'll need to weigh the cost of the points against the savings you'll receive in interest. If the interest savings are significant, paying points may be a good option. You'll also want to consider how long you plan to stay in the home. The longer you stay, the more you'll benefit from the lower interest rate.

Ultimately, the decision of whether or not to buy points on a VA mortgage is a personal one. There is no right or wrong answer, but it's important to do your research and make sure you understand all the pros and cons before making a decision.

FAQs About Points on a VA Loan

Q. What's the Difference Between Interest Rate and APR?

A. When it comes to taking out a loan, it's important to understand the difference between interest rate and APR. Simply put, the interest rate is the cost of borrowing money, while the APR is the true cost of taking out a loan.

The interest rate is the percentage of the loan that you will have to pay back in interest charges. This can be a fixed rate, which means that the interest rate will stay the same for the life of the loan, or it can be variable, which means that the interest rate can change over time.

The APR, on the other hand, is the true cost of taking out a loan. This includes not only the interest charges, but also any fees that may be charged by the lender. This can make the APR much higher than the interest rate alone.

When you are considering a loan, it's important to look at both the interest rate and the APR to get the full picture of the cost of the loan.

Q. Who pays the discount points on a VA loan?

A. The borrower pays the discount points on a VA loan. The amount of discount points varies depending on the loan amount, the borrower's credit score, and other factors.

Q. Who if anyone pays the discount points on a VA loan?

A. If you're wondering who pays for the discount points on a VA loan, the answer is that it can be the borrower, home seller or the lender. It all depends on how you structure your loan.

Q. How Do The Interest Rates For VA Home Loans Compare With Those For Other Mortgages?

A. If you're a veteran looking to buy a home, you may be wondering how the interest rates for VA home loans compare with those for other mortgages.

The answer depends on a few factors, including the type of loan you're applying for and the lender you're working with.

Generally speaking, VA home loans tend to have lower interest rates than conventional mortgages. This is because the VA guarantees a portion of the loan, which gives lenders a little more security and may allow them to offer a lower rate.

Of course, there are other factors that can affect the interest rate you're offered, so it's always a good idea to compare rates from a few different lenders before making a decision.

Read more about VA loans on the questions and answer page

Conclusion

In conclusion, paying points on a VA loan can save you money in the long run. It is important to shop around and compare rates before deciding whether or not to pay points. Points can also be used to buy down the interest rate on your loan.

SOURCE: Chapter 8. Borrower Fees and Charges and the VA
Funding Fee

Recommended Reading

  1. How To Qualify For A VA Loan As A Surviving Spouse
  2. Points on a VA Loan: What Are They and How Do They Work?
  3. Save Money on Your Mortgage by Amortizing Extra Payments