A VA loan is a mortgage guaranteed by the U.S. Department of Veterans Affairs (VA). Borrowers can purchase VA loan points at closing to lower the interest rate on their VA loan, but it’s important to do the math to ensure the payoff is worth it. Generally speaking, you’ll want to remain in the home for several years in order to break even when purchasing VA loan points.
Buying a home is likely one of the largest purchases you’ll ever make. For many homebuyers, getting the lowest possible monthly payment makes homeownership more affordable and manageable. If you’re eligible for a VA loan, using discount points to lower your interest rate can help you secure a lower payment and potentially save thousands over the life of your loan.
What Are Discount Points on a VA Loan?
Discount points, also called mortgage points, are fees you pay upfront to reduce your mortgage interest rate. Each point usually costs 1% of your total loan amount and lowers your rate by 0.25%.
For example if you get a $200000 VA loan at 4.5% interest, paying $2,000 (1 point) upfront would drop your rate to 4.25%. Paying $4,000 (2 points) would bring your rate down to 4%.
Buying points reduces your ongoing monthly payment because you’re getting a lower interest rate for the life of your loan. Even a small rate reduction can lead to substantial interest savings, especially if you keep the mortgage for many years.
How Do VA Loan Discount Points Work?
There are a few key things to understand about how discount points work specifically for VA home loans:
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You pay points upfront – Unlike other closing costs, you can’t roll points into your VA purchase loan. That means you’ll need to pay for any discount points in cash at closing
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Seller concessions can help – If you don’t have cash on hand for points, the seller can provide you with a credit to help cover closing costs. You can use that money to pay for your points. Sellers can give up to 4% of the purchase price.
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You can roll points into a VA refi – If you’re refinancing into another VA loan, you can roll up to 2 points into the loan amount as long as your total closing costs don’t exceed the appraised value.
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Lenders set limits – There’s no official VA limit on points, but lenders typically allow anywhere from 2-4 points. Ask your lender about their specific policies.
When Do VA Mortgage Points Make Sense?
Discount points only make financial sense if you keep your loan long enough to recoup the upfront cost through the savings on your monthly payments. Figure out your breakeven point by taking the cost of the points and dividing it by how much you’re lowering your monthly payment.
For example, if 1 point costs $2,000 and drops your payment by $50 per month, your breakeven is 40 months. As long as you keep the loan beyond that breakeven point, you’ll come out ahead in the long run.
Points tend to be most worthwhile when:
- You get a 30-year fixed rate loan
- You plan to keep the home long term
- Interest rates are relatively high
- You can itemize tax deductions for the points
On the other hand, points may not be the best option if rates are already very low or you may move or refinance soon.
Pros and Cons of VA Mortgage Discount Points
Before deciding whether to pay for VA loan discount points, weigh the potential benefits and drawbacks:
Pros
- Lower monthly mortgage payments
- Lower interest rate and interest costs over time
- May be tax deductible if you itemize
- Can roll into a VA refinance loan
Cons
- Higher upfront closing costs
- Need to stay in home long enough to recoup costs
- May not be worth it if rates are already very low
- Lose tax benefit if you don’t itemize deductions
Tips for Getting VA Loan Discount Points
If you’ve decided discount points could be a smart move, here are some tips to get started:
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Shop lenders – Compare quotes from multiple lenders to find the best rates and discount points options. Different lenders have different rate sheets.
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Ask about seller credits – If you can’t afford points upfront, ask your lender if the seller can provide a credit. You can use that money to buy points.
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See if points lower your payment enough – Do the math to verify the lower monthly payment is worth the extra upfront cost.
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Check deductibility – Consult a tax pro to see if you’ll benefit from deducting the points on your taxes.
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Compare rolling into a refi – If refinancing, see if it makes sense to pay for points by rolling them into your loan amount.
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Talk to a VA loan expert – A knowledgeable VA lender can explain if points are right for your unique situation.
FAQs About VA Mortgage Discount Points
If you’re still unsure how VA loan points work, here are answers to some common questions:
How many discount points can I buy on a VA loan?
Most lenders allow 2-4 discount points on a VA purchase or refinance loan. There’s no set limit, so the number of points depends on your lender.
When do I pay discount points on my VA loan?
You’ll need to pay for any discount points in cash at your loan closing. VA purchase loans don’t let you roll points into the loan amount.
Can I roll VA loan points into my refinance?
Yes. With a VA streamline or cash-out refinance, you can roll up to 2 discount points into the new loan amount. Your total closing costs just can’t exceed the home’s appraised value.
Are VA loan discount points tax deductible?
If you itemize deductions on your taxes, discount points used to buy or build your main home are tax deductible in most cases. Talk to a tax pro to understand how to claim the deduction.
How long do VA discount points take to pay off?
It depends on how much you prepay and how much your payment drops. Divide the point cost by the monthly savings to see your breakeven timeframe. Often it’s 3-5 years.
Get Expert Guidance on Using VA Loan Points
While discount points can lead to real savings on your VA home loan, make sure you understand all the ins and outs before moving forward. Reach out to the VA mortgage experts at Veterans United Home Loans today. We’re here to help you determine if paying for VA loan points is your best move.
How to determine the break-even point for VA loan points
To determine if purchasing VA loan discount points is worth it, you’ll need to calculate your break-even point, which tells you how long it takes to recoup your closing costs. The break-even point is determined by dividing the cost of the discount points by your monthly savings.
Here is an illustration of the break-even point for a $400,000 purchase loan with a 5.5% interest rate with no points. This loan has a 30-year fixed-rate term with no down payment.
| Discount points | Interest rate | Upfront cost for points | Monthly payment* | Monthly savings | Break-even point |
|---|---|---|---|---|---|
| 0 | 5.5% | 0 | $2,271 | N/A | N/A |
| 1 | 5.25% | $4,000 | $2,209 | $62 | $4,000/$62 = 64.5 months |
| 2 | 5.0% | $8,000 | $2,147 | $124 | $8,000/$124 = 64.5 months |
| 3 | 4.75% | $12,000 | $2,087 | $184 | $12,000/$184 = 65.2 months |
| 4 | 4.5% | $16,000 | $2,027 | $244 | $16,000/$244 = 65.6 months |
*Includes principal and interest only. Taxes and insurance not included.
In these examples, it takes approximately five and a half years to break even when purchasing VA loan points. Therefore, you’d need to stay in the home that long or longer to make it cost-effective. If you think you will move or refinance the loan before that term is up, it’s not a good financial move to buy discount points.
However, there is another benefit of paying for 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.
| Discount points | Interest rate | Upfront cost for points | Monthly payment* | Monthly savings | Break-even point |
|---|---|---|---|---|---|
| 0 | 5.5% | 0 | $2,271 | N/A | N/A |
| 1 | 5.25% | $4,000 | $2,209 | $62 | $4,000/$62 = 64.5 months |
| 2 | 5.0% | $8,000 | $2,147 | $124 | $8,000/$124 = 64.5 months |
| 3 | 4.75% | $12,000 | $2,087 | $184 | $12,000/$184 = 65.2 months |
| 4 | 4.5% | $16,000 | $2,027 | $244 | $16,000/$244 = 65.6 months |
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.
THINGS YOU SHOULD KNOW
If you’re looking to refinance a VA loan with a VA IRRRL, you’re required to recoup your closing costs within 36 months. In other words, you need to hit your break-even point within three years or your application will be denied.
How VA discount loan points work
Purchasing VA loan points can provide not only monthly savings on your mortgage payment, but if you stay in the home for many years, it also could result in major interest savings over the length of the loan.
Here’s a breakdown of what purchasing VA loan points looks like:
→ The cost of 1 point is 1% of the loan amount. Therefore, if the total loan amount is $400,000, the cost of 1 point is $4,000. → The VA does not have a limit to how many points you can buy on a VA loan, but lenders may impose their own limits on how many points you can purchase. → For purchase loans, borrowers must pay for points in cash at the time of closing. They cannot be rolled into the loan amount. → If the loan is a VA streamline refinance — also known as a VA interest rate reduction refinance loan, or VA IRRRL — borrowers can roll up to 2 points into the loan amount. → When purchasing VA loan points on a cash-out refinance, borrowers cannot roll the cost of the points into the loan amount. However, once the borrower receives cash from the loan proceeds, the borrower can use those funds to pay for the VA loan points if the lender agrees.