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Can I Buy Down Points on a VA Loan?
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If you have a tight budget for your housing payment, you may be asking the question: Can I buy down points on a VA loan to get a lower rate? The answer is yes, but you’ll need to weigh the pros and cons to decide if the extra expense is worth it.
How VA discount points work
We’ve already answered the question “Can I buy down points on a VA loan?” It’s just one of many advantages active-duty and retired military service members enjoy with a home loan backed by the U.S. Department of Veterans Affairs (VA). Other benefits include no down payment, no mortgage insurance and lenient qualifying guidelines.
A discount point is a percentage of your loan amount. The more you’re willing to pay, the lower your interest rate — and ultimately your mortgage payment — will be. A full point equals 1% of your loan amount. For example, if you’re borrowing $200,000 and pay one point for a lower rate, it’ll cost you $2,000.
However, points aren’t always round numbers. You may also pay “partial points” to get a lower rate on a VA home loan. If the extra $2,000 for a full discount point on a $200,000 loan is too pricey, you could choose to pay half of a point, which would cost you $1,000. The catch: Your interest rate usually won’t drop as much with a smaller discount buydown.
Using discount points for a lower VA purchase rate
VA guidelines are designed to protect military service members by limiting allowable VA loan closing costs. They also give you the flexibility to have the home seller pay for your lower VA interest rate.
Discount fees can be paid by the seller
VA loan requirements permit a seller to pay up to 4% of your loan amount toward closing costs, including discount points. This may help keep your monthly payment as low as possible without emptying your savings account.
Discount fees can’t be added to your loan amount for a purchase
You’ll either need to pay discount points out of pocket or ask the seller to pay them with a concession.
Using discount points for a lower VA refinance rate
Paying points on a mortgage may buy you a lower rate if you’re refinancing. However, VA guidelines require a maximum breakeven on your total VA closing costs. A refinance breakeven calculates how many months it will take you to recover your total closing costs.
VA IRRRL discount point restrictions
Short for an interest rate reduction refinance loan, a VA IRRRL comes with extra rules regarding discount points:
- Your total fees, closing costs and loan expenses must be recouped in 36 months or less.
- You can’t roll more than two discount points into the loan amount.
VA cash-out refinance
VA home loan rules give you an edge when it comes to tapping home equity. You can borrow up to 90% of your home’s value versus 80% for most other loan programs. But if you buy down your interest rate with discount points, you’ll also need to meet the following guidelines:
- Your closing cost breakeven can’t exceed 36 months.
- You can’t roll costs in, including discount points, for more than 90% of your home’s value.
Calculating the breakeven on discount points
To determine the benefits and costs of paying points on a mortgage, calculate your breakeven. The calculation is simple: Divide the total cost of the discount points by your monthly savings.
The example below illustrates the break-even periods after buying discount points on a $250,000 mortgage, assuming the rate for no points is 3.5% for a 30-year, fixed-rate VA loan.
|Interest rate||Montdly payment (principal and interest)||Discount point buydown||Discount point buydown $ cost||Break-even point vs. 3.50% (Points cost/monthly payment savings = break-even months)|
|3.375%||$1,105.24||0.5%||$1,250||$1,250/$17.37 = 71.96 months|
|3.25%||$1,088.02||1.0%||$2,500||$2,500/$34.59 = 72.28 months|
|3.00%||$1,054.01||2.0%||$5,000||$5,000/$68.60 = 72.89 months|
In all three discount point buydown examples, it takes roughly 72 months, or six years, for you to break even on the costs. Unless you stay in the home for at least that long, it doesn’t make sense to pay discount points.
However, there is another benefit to paying points for a lower rate: the lifetime interest savings. The table below reflects the total interest savings over the full 30-year loan term for each option.
|Interest rate||Lifetime interest paid||Lifetime interest savings vs. 3.50%|
The more you spend in discount points, the bigger the savings are over the long term. Additionally, the monthly savings of a buydown rate can be applied to other goals, such as funding a college or retirement fund.
Pros and cons of paying discount points on a VA loan
- You’ll get a lower rate for a forever home.
- You may be able to write off the points on your taxes if they were used to buy your home or tap equity for home improvements.
- You’ll typically have a lower monthly payment.
- You’ll pay less in interest charges over the life of the loan.
- You’ll need to stay in your home longer to recoup the discount point cost.
- You’ll pay more in total closing costs.
- You may not meet the 36-month VA break-even requirement.
- You may lose money if the military requires you to relocate to a new area.
Don’t be pressured into paying points on a mortgage
Congress passed the Economic Growth, Regulatory Relief and Consumer Protection Act to address abuses by unethical mortgage companies. As a result, the VA changed lending guidelines to protect future VA borrowers against predatory lenders.
Be wary of any offer that sounds too good to be true. If you feel like you haven’t been treated fairly, submit a complaint to the Consumer Financial Protection Bureau.