Do You Pay Points on a VA Loan?

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

No points ban symbolWhen purchasing a property with a VA loan, you may question whether you will be required to pay points. Loan points are a one-time payment paid to the lender in return for a reduced interest rate.

The good news is that you may be able to reduce your interest rate on your VA loan by paying points. The amount of the interest rate decrease is determined by the number of points paid and market interest rates at the time.

We will examine the costs and advantages of paying points on your VA loan in this post. Additionally, we will cover how to get a cheaper interest rate by paying points.

How to Calculate Discount Points on a Mortgage

The first step in paying discount points on your VA loan is to have an understanding of what they are.

Assume a borrower is applying for a $200,000 loan and the lender presents the borrower with two interest rate options. One loan at 4% with no points and another at 3.75 percent with one discount point. We'll compare the two options:

Option (1)
Loan amount – $200,000 at 4% for a 30-year period calculates to a monthly payment of $955. (principal and interest only)

Option (2) Loan amount – $200,000 at an interest rate of 3.75 percent plus one point over a 30-year period returns a monthly payment of $926. (principal and interest only)

As you can see, the rate decrease of 1/4 percent reduces the monthly principal and interest payment by $29 with one discount point. In this case, the borrower paid $2,000 for the discount point (1 percent X 200,000) and lowered the monthly payment by $29.

Is It Worth It to Pay Points on a Mortgage?

Does paying $2,000 to save $29 monthly worth the expense?

Divide $2,000 by $29 to determine the break even point.

$2,000 divided by $29 equals about 69 months or approximately 6 years. What does this mean? The borrower saved $29 each month, but it required $2,000 to achieve the $29 monthly savings.

If this borrower lives in the home for more than 6 years, that one discount point was worthwhile.

Should you buy discount points?

Typically, you may acquire VA mortgage points from your loan originator or lender. Before you make a loan application, discuss the possibility of buying discount points with your loan officer or broker. Request that they present you with an estimate of the cost and savings so that you can determine the break-even point.

Pros and Cons of Buying Points on a Mortgage

PRO

There are both pros and cons to paying points on a VA loan. On the plus side, paying points may reduce your interest rate and make the loan more affordable.

When determining whether or not to purchase discount points for your VA loan, it is a good idea to start with the break-even point.
In order to assess whether or not it is appropriate for you, you should examine the following factors:

If you are able to negotiate a concession from the seller to cover a portion (or all) of your closing expenses, which will allow you to afford discount points.

You have the financial means to pay the cost of a purchase loan in full up front.

You intend to remain in the house for a period of time sufficient to achieve break-even.

CON

However, there are also disadvantages to paying points. There is a cost to paying discount points. If you believe you will pay off the mortgage within a short period of time, a better option may be to just make an over-payment each month.

Buying VA loan points, on the other hand, may be a negative idea if you fall into one of the following categories:

  • You are unable to make the advance payment due to financial constraints.
  • You don't intend to remain in the house for an extended period of time.
  • The parameters of your refinancing loan do not fulfill the standards of the VA.
  • Interest rates are already at historically low levels, and the potential savings are not worth the cost.

Rotating question markFrequently Asked Questions (FAQs)

Q. Can a lender charge points on a VA loan
A. Lenders are permitted by the Department of Veteran Affairs to charge points on a VA home loan.

Q. Can I use a VA loan if I already have one?
A. Your eligibility for a second home or investment property is dictated by any remaining eligibility. Speak to the loan officer who originated your current loan to determine if you can acquire another property. Watch video.

Q. Can I use my VA loan to buy a business?
A. No

Q. Do VA loans have points?
A. There is no requirement that discount points are included in VA loans.

Q. Do VA loan interest rates vary?
A. Interest rates on a VA loan will vary from lender to lender. It pays to shop around.

Q. Do I pay points on a VA loan?
A. There is no requirement that the borrower pay discount points

Q. Do you pay interest on a VA home loan?
A. Yes

Q. Do you pay mortgage insurance on a VA loan?
A. With a VA loan, you will not be required to pay monthly mortgage insurance. Unless you qualify for an exemption, you must pay a VA funding fee.

Q. Do VA loans have prepayment penalties?
A. Absolutely not

Q. How many points can you buy down on a VA loan?
A. Following a check of numerous lender rate sheets, it seems that three points are the most points that make sense.

Q. How much interest is on a VA loan?
A. The amount of interest paid on a VA loan is determined by the loan amount, the interest rate, and the loan period. You can estimate your scenario by using the amortization calculator.

Q. Who pays points on a VA loan?
A. The borrower usually pays any discount points. The seller may pay the discount points, if agreed to and stated in the sales contract.

Conclusion

As with any financial choice, it's critical that you take the time to carefully analyze your alternatives, as well as their advantages and disadvantages, in order to make the best selection possible. Speak to your lender and ask for a detailed estimate of paying points to lower your interest rate.