Everything You Need to Know About Buying Down the Interest Rate on a VA Loan

Buying down the interest rate on a VA loan can help reduce your monthly payments and save money over the life of your mortgage. But how exactly does it work and is it always a smart move? This comprehensive guide covers everything you need to know about buying down a VA loan interest rate.

What Does “Buying Down” the Interest Rate Mean?

When you “buy down” the interest rate on a VA loan, you are paying extra money upfront to reduce the interest rate for either a set period of time or the entire term of the loan. This is done by paying “discount points” at closing.

Discount points are fees paid to the lender to lower the interest rate – usually around 1% of the total loan amount per discount point. On a VA loan, one discount point typically reduces the interest rate by 0.25%.

For example, if you get a $300,000 VA loan at 5.5% interest, you could pay $3,000 (1% of $300,000) to lower the rate by 025% to 5.25%. The more discount points you pay, the lower the rate goes

Buying down the rate results in a lower monthly payment and interest savings over the life of the loan. But you have to pay those points upfront, so it increases your closing costs.

How Do Temporary VA Buydowns Work?

Veterans also have the option of a temporary interest rate buydown on a VA loan. This reduces the rate for 1-3 years before it returns to the original market rate.

For temporary VA buydowns:

• Funds are placed in an escrow account and released each month to reduce the payment.
• The rate reduction must be in equal increments over the buydown period.
• Temporary buydowns last 1-3 years.
• The rate can increase by up to 1% each year as the buydown ends.
• The escrow funds cannot be used for anything but the buydown.

Let’s say you get a $300,000 VA loan at 5.5% fixed but do a 2-year temporary buydown to 4.75%. You’d have a lower payment for two years before it returns to the original 5.5% rate.

Temporary buydowns help make payments affordable in early years. But you still pay closing costs upfront in exchange for savings during the temporary buydown period.

Who Pays for VA Buydown Points?

On a VA purchase loan, the borrower pays the discount points at closing if they want to buy down the rate. However, the seller can give a closing cost concession of up to 4% of the purchase price to help cover the borrower’s closing costs, including discount points.

If it’s a VA streamline refinance, the borrower can finance up to 2 discount points into the new loan amount. For cash-out refinances, you typically have to pay the points out of pocket at closing.

The seller, lender/broker, or builder can also fund temporary interest rate buydowns for the borrower by placing money in an escrow account.

How Much Does Buying Down a VA Loan Rate Cost?

As mentioned earlier, each discount point typically costs 1% of the total VA loan amount and reduces the rate by 0.25%. On a $300,000 loan, 1 point would cost $3,000 and take the rate down by 0.25%.

There is no limit on how many discount points you can buy on a VA loan, but most lenders set their own limits. The more points purchased, the lower the rate goes.

With a temporary VA buydown, the costs vary depending on the length of the buydown period and how much the rate decreases during that time. This money is placed in an escrow account and released each month to reduce payments for the set buydown period.

The Pros and Cons of Buying Down a VA Loan Rate

Before paying for discount points, weigh the potential pros and cons:

Pros

• Lower interest rate and monthly payments
• Interest savings over the loan term
• Lower payment frees up money for other goals
• Tax deductions if used for primary home purchase

Cons

• Higher upfront closing costs
• Breakeven takes 5+ years
• Lose money if moving before breakeven
• Fail VA refi breakeven requirement

Buying down the rate saves money long-term but increases total fees paid. It only makes sense if you know you’ll stay in the home beyond the breakeven point.

How to Calculate the Breakeven Point on VA Discount Points

To determine if discount points are worth it, calculate the “breakeven point” – when the savings surpass the upfront cost.

Take the cost of the points and divide it by the monthly savings from the lower payment. This tells you how many months it takes to recoup the expense through savings.

For example:

• 1 point costs $3,000
• Lowers payment by $50 per month
• $3,000 / $50 per month = 60 months (5 years) breakeven point

Generally, you need to stay in the home 5+ years to benefit from buying down a VA loan rate with discount points.

When Does it Make Sense to Buy Down a VA Mortgage Rate?

Buying down VA loan points can be smart in certain situations:

• You know you’ll stay past the breakeven point
• You plan to keep the home long-term
• The lower payment allows you to pursue other financial goals
• You meet the breakeven rule for VA streamline refinancing

However, it may not be the best option if:

• You may move before hitting the breakeven point
• You want to minimize upfront closing costs
• Your timeline is uncertain due to military relocations
• You fall short of VA refi breakeven requirements

Do the math to see if buying down points with your timeline and budget makes sense. If not, shop lenders to find the best rate or improve your credit to qualify for lower rates.

Alternatives If You Don’t Want to Pay Discount Points

If you don’t want to buy down the VA loan interest rate, consider:

• Shopping lenders to get the lowest base rate without points
• Credit boosting to qualify for a lower rate with your current score
• Locking your rate early to guarantee the rate before it increases
• Waiting and monitoring rates if they are trending down currently
• Paying down debt to improve your debt-to-income ratio for better rates
• Making a larger down payment if possible to get better rates from lenders

Using these alternatives can help you get a lower rate without buying down points on a VA loan.

Frequently Asked Questions About VA Mortgage Rate Buydowns

Here are answers to some common questions about buying down VA loan interest rates:

Can you buy down points on a VA loan?

Yes, VA buyers can pay discount points to permanently or temporarily buy down their interest rate and reduce payments.

Do VA loans have funding fees and discount points?

The VA funding fee is different than discount points. The funding fee is a set cost that helps the VA fund the program. Discount points are optional fees paid by the borrower to reduce interest rates.

Who usually pays the points on a VA loan?

The borrower pays the points at closing. However, the seller can provide a closing cost concession to help cover the points.

How much does each VA loan point reduce the interest rate?

Typically each discount point costs 1% of the loan amount and reduces the interest rate by 0.25%. Lenders have different policies though.

Is buying points on a VA loan worth it?

It can be if you know you’ll stay in the home long enough to recoup the costs through interest savings. Do the math based on your situation.

The Bottom Line

Buying down the interest rate with VA loan discount points allows you to reduce payments and interest costs over time. But you have to pay those points upfront, so weigh the trade offs carefully.

Use this guide to understand how VA rate buydowns work, who pays for points, breakeven calculations, and scenarios when discount points make sense or not. Consider the options to get a lower rate without buying points too.