Should You Buy Points on a VA Loan? A Guide for Veterans

For Veterans using a VA home loan paying points upfront can lower your interest rate and monthly payments. But is it worth the extra closing costs? Here we’ll explore whether buying points makes sense with a VA mortgage.

VA loans offer great benefits like no down payment and no private mortgage insurance (PMI). Even so, you may want to reduce your payments further by purchasing discount points. Weigh the pros and cons to decide if points fit your homebuying budget and timeline.

Below we’ll look at how VA loan points work, their costs and benefits, and who can benefit most from paying points on a VA mortgage.

What Are Mortgage Points on a VA Loan?

First, let’s review what points are on a VA mortgage.

• Discount points are fees paid upfront to lower your interest rate.
• Each point typically costs 1% of the total loan amount.
• Each point usually reduces your rate by 0.25%.
• VA loans let you buy discount points to reduce your rate and payments.

For example, if you pay $2,000 in discount points on a $200,000 VA loan, your rate may decrease by 0.50% or more.

You cannot buy origination points or other fees to increase your rate on a VA loan Only discount points to lower your rate are allowed

How Do VA Loan Points Work?

VA discount points basically function the same way as with conventional mortgages. But there are some key differences:

• You cannot roll points into a VA purchase loan; you’ll need to pay for points upfront in cash.
• For VA IRRRL refinances, you can roll up to 2 discount points into the loan.
• Seller concessions up to 4% of the purchase price can help free up cash for points.
• There is no limit on how many points you can buy if the lender allows it.

Talk to your VA lender to understand your options for paying for points at closing.

What Are the Pros and Cons of Buying Points?

Before paying for VA loan discount points, weigh the advantages and potential drawbacks:

Pros

• Lower interest rate saves money long-term
• Lower monthly mortgage payments
• May deduct points on taxes if itemizing

Cons

• Higher upfront closing costs
• Must keep loan long enough to recoup costs
• May not be worth it if rates are already low

Crunch the numbers with your lender to see if points make sense based on your loan amount, timeline, and budget.

Who Benefits Most From Paying Points?

Certain VA loan borrowers stand to benefit the most from paying points:

• Lower income borrowers who want to reduce monthly payments
• Buyers who plan to keep the home long-term, like 10+ years
• Buyers able to cover closing costs with cash or seller help
• Those with excellent credit who qualify for the lowest rates
• Borrowers in high cost-of-living areas with expensive homes

On the other hand, points tend not to be advised for:

• Buyers only staying in the home short-term
• Those with higher credit scores already getting the best rates
• Borrowers without extra cash to pay for points upfront
• Veterans making quick moves for military relocations

Talk to your lender about your unique situation.

How Many Points Should You Buy?

Most experts suggest buying points if you plan to keep the mortgage for at least 5-7 years. The more points you pay upfront, the quicker the payoff.

There is no set limit on VA loan points – it varies by lender. But most lenders allow around 2-4 discount points maximum.

Run the numbers to see which makes sense based on your loan amount, savings, and goals. It comes down to your break-even timeline and when you’ll recoup the upfront costs through lower monthly payments.

Can You Negotiate VA Mortgage Points?

Yes, you can negotiate with lenders on how many discount points to purchase for your VA loan. Let them know your budget and goals and find the rate reduction that fits best.

You can also ask for a rate lock extension if rates drop after you lock. Some lenders will refund your points so you can re-lock at better pricing.

Shopping lenders and negotiating points can help you maximize savings on a VA loan.

Can Sellers Pay for VA Loan Points?

Sellers cannot directly pay for your VA loan discount points. But they can provide seller credits or concessions at closing to help cover points and other fees.

VA allows sellers credits up to 4% of the purchase price. So on a $300,000 home, the seller could give $12,000 to help with points and closing costs.

Ask your real estate agent to request the maximum allowable seller concessions during purchase negotiations. Then use those funds to cover your points for a lower VA interest rate.

Are Discount Points Tax Deductible on a VA Loan?

If you itemize deductions on your taxes, you may be able to deduct VA loan points just like with a conventional mortgage. The points must have been used to purchase or improve your main home.

You’ll deduct the points over the life of the loan. Talk to your lender or tax professional about deducting points when preparing your return.

How Can You Buy Points With No Cash for a VA Loan?

As mentioned above, seller credits at closing are the main way to pay for VA loan points if you don’t have extra cash. You cannot roll points into a VA purchase loan.

For VA IRRRL refinances, you can roll up to 2 discount points into the new loan. This lets you buy down your rate without paying points out of pocket.

You may also qualify for down payment assistance programs that provide funds usable for points and closing costs. Your lender can advise on available options.

When Do VA Mortgage Points Make Sense?

Paying points upfront can save substantially over the life of your VA home loan. Make sure you break even within 5-7 years by lowering your rate 0.25 to 0.5% or more.

Run the math with various point options and loan terms. Focus on long-term savings, not just the high closing costs. Points work best for buyers planning to keep their home and VA loan for many years.

The bottom line is VA loan points provide an opportunity for smart savers to reduce their lifetime interest expenses. Discuss with your lender to see if points fit your unique situation.