Do You Pay Points on a VA Loan?

If 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 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.

VA Home Loan: What Are Discount Points?

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

Do You Have to Pay Points on a VA Loan?

There's a lot of misinformation about VA loans, and one of the most common misconceptions is that you have to pay "points" to get one. That's not true!

VA loans are available to eligible veterans and service members, and they provide several 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 the points? Points are a form of prepaid interest, and lenders typically charge them to lower the interest rate on loans. 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 decide to pay points on a VA loan, you can 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 deciding. And remember, you don't have to pay points on a VA loan!

Discount Points Calculation 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 you can pay at closing to lower your interest rate, and 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. The discount points will be applied to whatever the borrower and lender decide. 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 number of interest points you pay will affect how much your monthly payments will be and the total amount of interest you'll pay over the life of the loan. So it's essential to calculate how much paying points will cost you in 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%. You would take 4.5% and subtract 4.25% to get your monthly savings, equaling 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?

Do 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 lend money for VA loans, and the VA 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 can offer lower interest rates to VA loan borrowers. 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 want to learn more about how they work, please get in touch with a VA loan expert.

How Do You Buy Mortgage Points?

In case you were wondering how paying points on a mortgage is pretty straightforward. You will be required to pay the points associated with your mortgage at closing, with the other closing costs. One point equals 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.

The home seller can pay the discount points on the buyer's behalf, resulting in less cash required at closing.

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

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

How Many Loan Discount Points Can I Buy?

VA loans do not have a discount point cap. However, the mortgage lender handling your mortgage loan ultimately decides the number of points you are allowed to purchase, and most lenders won't let you purchase more than 4 points at a time.

Is It Good to Buy Points on a VA Mortgage?

Regarding a VA mortgage, the question of whether or not it is good to pay points may arise. This question has no simple answer, as several factors must be considered. However, 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. Paying points may be a good option if the interest savings are significant. 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 essential to research and ensure you understand all the pros and cons before deciding.

Conclusion

In conclusion, VA loans are among the most beneficial home financing options available due to their low-interest rates and no required down payment. When considering a VA loan, it is essential to understand the concept of points and whether they may be part of your home loan agreement. Although some lenders may charge points as part of closing costs, many will cover these costs, so borrowers do not have to pay them out-of-pocket.

SOURCE:
https://www.home.loans/va-loans
https://www.forbes.com/advisor/mortgages/va-loan-closing-costs/
https://www.upwellmortgage.com/va-loans/