VA Loan Points: How to Buy a Lower Mortgage Rate

If you’re a qualified military borrower, you have the option to lower your mortgage interest rate by purchasing VA loan points. Also known as discount points, they’re an added fee you pay when closing on a home to reduce your mortgage rate by a set amount.

A lower interest rate can help you save money each month and over the long haul, but buying VA loan discount points may not be the right choice for every borrower. Here’s what you need to know when weighing your options.

Key takeaways

• VA loan discount points are an added fee that you can pay to lower the interest rate on your mortgage.
• One point typically costs 1% of your total loan amount and lowers your interest rate by up to 0.25 percentage points.
• Lowering your mortgage rate can help save you money on your monthly payment and interest changes over the life of the loan.

What are VA loan points?

VA loan discount points are added fees that you can pay to reduce the interest rate on your mortgage loan. One discount point typically costs 1% of the total loan amount and will usually reduce the interest rate by 0.25 percentage points. For example, if you bought a $300,000 house and were offered a 6.50% interest rate, buying 1 VA loan point would cost $3,000 and lower your interest rate to 6.25%.

You’ll pay for discount points at closing and can choose to purchase more than one point or fractions of a point. Either way, buying down your interest rate can help lower your monthly mortgage payment and save you money on interest fees over the life of your loan.

How VA loan discount points work

In many respects, purchasing VA loan points works just like buying down the interest rate on any other type of home loan. However, there are a few unique features of VA loan points that you should be aware of.

• Financing points:
  • VA purchase loans: Borrowers must pay for points in cash at closing — they cannot be rolled into the loan amount. So even though you’re not required to make a down payment on most VA loans, choosing to pay for discount points will add to your total closing costs required to buy the home.
  • VA streamline refinances: Borrowers can roll up to 2 points into the loan amount with a VA interest rate reduction refinance loan (IRRRL). Any additional discount points must be paid in cash.
  • VA cash-out refinances: Borrowers can’t roll the cost of the points into the loan amount for a VA cash-out refinance. 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.
• Seller concessions: If you don’t have enough cash on hand to pay for your VA loan discount points, consider asking for a seller concession. In this situation, the seller agrees to pay a portion of your closing costs on your behalf, which can include discount points. VA loans allow for up to 4% seller concessions, which is a little more restrictive than the 3% to 9% (depending on down payment amount) conventional loans allow.

When is it worth it to pay for points on a VA loan?

As a rule of thumb, it only makes sense to pay for points on a VA loan if you plan to own the home long enough to see interest savings after recouping the upfront cost. The amount of time it will take to see that savings is known as your break-even point.

How to determine the break-even point for a VA loan with points

You’ll need to calculate your break-even point to determine if purchasing VA loan discount points is worth the cost. This calculation tells you how long it will take for the points to “pay for themselves” by saving you more than they cost.

You can find out when you’ll break even by dividing the cost of your discount points by the monthly savings they’ll bring you.

Example: Calculating your VA loan break-even point

Here’s an example of the break-even point calculation for a $400,000 purchase loan with a 7.00% interest rate. We’ve crunched the numbers for the loan before and after buying points. This loan has a 30-year fixed-rate term with no down payment.

*Includes principal and interest only. Taxes and insurance not included.

Takeaway: In these examples, it takes approximately five years to break even when purchasing VA loan points. With that in mind, you’d need to stay in your home for at least that long to make buying points cost-effective. So if you think you’ll move or refinance the loan before that time is up, it’s not a good financial move to buy discount points.

Thinking beyond the break-even point

Even if you break even on a refinance with VA loan points, you may want to consider an alternative strategy: putting the funds you would pay for points toward lowering your principal balance instead. Before you commit to points, do the calculations to assess this paydown option and compare.

Example: Calculating your VA loan points savings

There’s another benefit to paying for points even beyond lower monthly payments: lifetime interest savings. You can calculate this by plugging your loan details — both with points and without — into a mortgage calculator, and then comparing the total interest you’d pay with each loan.

To continue our example above, here’s the total interest savings over the full 30-year loan term for a borrower paying between 1 and 4 discount points.

Takeaway: The more you spend on discount points, the bigger your savings will be over the life of the loan. Over time, it may be possible to apply the money you’re saving on interest to other financial goals, such as getting out of debt or building an emergency fund.

FYI: Break-even requirements for an IRRRL loan

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.

Pros and cons of purchasing VA loan points

Is buying VA loan discount points right for you?

 3 signs buying VA loan points might be a good choice for you

1. You plan to own the home beyond the break-even point, allowing you to truly start saving on your monthly payment.
2. You plan to remain in the home for the life of the loan. This maximizes your lifetime interest savings, thanks to the lower mortgage interest rate.
3. You can apply the money you’ll save to other financial goals, such as retirement savings, kids’ college tuition or vacation funds.

 4 signs buying mortgage discount points may not be right for you

1. You’re refinancing a VA loan and won’t be able to recoup the cost of your refinance by the end of the required 36-month break-even period.
2. You think you may need to sell the home before the break-even point on your VA purchase loan.
3. You don’t have enough money to cover the cost of the discount points when purchasing a home, and the seller can’t provide any concessions for you.
4. You could save more money by diverting the funds you would’ve spent on points toward reducing your principal balance.