Understanding Points on a VA Home Loan

Buying a home is likely one of the biggest financial decisions you’ll make in your life For many military service members and veterans, a VA home loan can help make homeownership more accessible and affordable When shopping for a VA mortgage, you may come across the concept of “points” and wonder if they could benefit you. Here’s an in-depth look at what points are, how they work with VA loans, and whether purchasing them makes sense for your situation.

What Are Points on a Mortgage Loan?

First let’s start with what points actually are. Points also called discount points, are fees you can pay upfront when taking out a mortgage in order to lower the interest rate on your loan. Each point typically costs 1% of the total loan amount and reduces your interest rate by 0.25%.

For example if you took out a $200,000 loan and paid for one point at 1% of the loan amount that point would cost $2,000. In return for paying that $2,000 upfront, your interest rate would decrease by 0.25%. If your rate was originally 4.5%, buying one point would bring it down to 4.25%.

The more points you pay for, the more your rate decreases. While one point generally lowers the rate by 0.25%, two points would lower it by 0.5%, three points by 0.75%, and so on.

How Do Points Work on VA Loans?

VA loans have some unique rules and benefits when it comes to points that are important to understand. Here are a few key things to know:

• You can’t roll points into a VA purchase loan – With a conventional loan, you can frequently finance points into your loan amount. But with a VA purchase loan, you need to pay for points upfront in cash at closing.

• You may be able to roll up to 2 points into a VA refinance – If you’re refinancing into another VA loan, such as a VA Streamline Refinance (IRRRL), you may be able to roll up to 2 points into the new loan amount.

• Points can help you qualify – Paying for points to buy down your rate can actually help you meet VA debt-to-income requirements if a lower monthly payment improves your DTI.

• No limit on max points – The VA itself does not limit how many points you can pay on a loan, but lenders generally cap it around 4 points.

• Points can’t affect the funding fee – Your VA funding fee is set based on the loan amount and your military status. Points don’t change the funding fee calculation.

The Pros and Cons of Buying Points on a VA Loan

Like any financial decision, purchasing points has both advantages and potential drawbacks. As you think about whether to buy points for your VA loan, here are some key pros and cons to consider:

Pros

• Lower interest rate and monthly payment
• Pay less interest over the loan term
• Improve qualification chances if needed
• Potentially tax deductible (with itemized deductions)

Cons

• Higher upfront closing costs
• Loan amount increases with refinance points
• May not recoup costs if you sell quickly
• Not beneficial if rates are already low

As you can see, points essentially involve paying more money upfront in order to save interest and lower payments over time. Whether that tradeoff makes sense depends on your personal financial situation.

How to Calculate If Buying Points Is Worth It

To decide if points are a smart move, you’ll want to calculate your “breakeven point” – the point at which your upfront costs are recouped through the money you save each month with a lower rate. Here are the key steps:

1. Calculate your monthly mortgage payment both with and without points. See how much your payment drops each month when buying points.

2. Determine your total upfront cost for the points based on the point amount (usually 1% of loan total per point) and number of points purchased.

3. Divide your total point costs by the amount your monthly payment decreases. This tells you how many months it will take to recoup the upfront expense through monthly savings.

4. Decide if you plan on keeping the home and mortgage long enough to reach the breakeven point. If so, the points may be worthwhile.

Work closely with your VA lender to crunch the numbers and see if points make sense in your unique situation. The breakeven horizon is a key factor – buying points likely only benefits you if you plan to keep the home long term.

Scenarios Where Points May or May Not Be Beneficial

To give you a better idea of when points might (or might not) be a smart choice, here are a few sample scenarios:

When points may make sense:

• You know you’ll stay in the home long term (e.g. more than 5-7 years)
• Interest rates are relatively high and points significantly lower your rate
• You have cash available to pay for points upfront
• Your DTI is borderline and a lower payment helps you qualify

When points may not be beneficial:

• You may move or refinance within 3-5 years
• Rates are already very low, so points don’t save much
• You have limited funds available for closing costs
• You’ll need to roll multiple points into a refinance

As a general guideline, plan on staying in the home at least long enough to recoup the upfront cost before buying points. But discuss your unique situation with a lender to be sure.

##Alternatives to Paying Discount Points on a VA Loan

If you don’t want to pay for points upfront or don’t qualify to roll them into your loan, here are a couple alternatives to consider:

• Ask for seller concessions – The seller can provide a credit at closing to cover your closing costs, freeing up cash for you to buy points.

• Shop for lower rates – Compare rates across multiple lenders to see if you can get a competitive rate without paying points.

• Consider a shorter-term loan – Shorter loan terms (e.g. 15-year mortgage) have lower rates, so may avoid the need for points.

• Make a larger down payment – The more equity you have, the lower rate lenders can typically offer, reducing the need for points.

The Bottom Line on VA Loan Points

As a VA borrower, you have the option to pay points for a lower rate, but it’s not required. Thoroughly discuss the pros, cons, and breakeven math with your loan officer. Points can provide savings over time, but won’t benefit every homebuyer. Be sure you’ll stay in the home long enough to recoup the costs and that reducing your rate with points aligns with your financial plan.