Get the Best Rates with VA Loan Pay Points

Points can lower your interest rate. How much can you save with discount points?

Man holding a card that reads discount pointsUnderstand the different points associated with the VA Loan to help decide if paying the extra fees is worth it when purchasing a home without a large down payment. Discount points can lower your interest rate, while origination points are fees charged by the lender for processing the loan.

What Are Discount Points on a VA Home Loan?

A homebuyer can pay a lender discount points, which are a form of prepaid interest, in order to get a lower interest rate on a mortgage. Each point costs 1% of the total loan amount; for example, two points (2% of the total loan amount) on a $200,000 loan can give the homebuyer a lower interest rate.

The lender lowers the interest rate by 0.125% for every point a veteran pays. For example, a veteran paying two points on a $200,000 loan would lower the interest rate from 4.5% to 4.25%.

What is an origination point on a VA loan?

Lenders charge borrowers up to 1 percent of the loan amount as a loan origination fee to cover overhead, pay for employees, and keep the office running to offer VA loans. A common fee is 1 percent of the loan amount, so on a $200,000 loan, the fee would be $2,000. Other loan types such as FHA and conventional loans may have a fee exceeding 1 percent, but the VA caps the fee at 1 percent, including other typical lending fees such as processing and underwriting fees. This cap does not affect the ability to buy discount points.

Do You Have to Pay Points on a VA Loan?

Mortgage interest graphicYou do not have to pay points on a VA loan. VA loans provide eligible veterans and service members with benefits such as no down payment and no monthly mortgage insurance, and they do not require the borrower to pay any points upfront.

VA loans are a great option for many borrowers, as they can provide substantial savings over traditional mortgages. There are closing costs associated with VA loans, but they are usually much lower than what you would pay for a traditional mortgage.

Additionally, VA loans limit certain fees, such as origination fees and broker fees, which can help keep costs low. Additionally, VA loans typically do not require borrowers to pay for private mortgage insurance, which can save you money in the long run.

How to Calculate Discount Points on a VA Mortgage?

  1. Determine the loan amount, including the VA funding fee if applicable.
  2. Calculate the cost of one discount point by multiplying the loan amount by 1%.
  3. Calculate the monthly savings from discount points by subtracting the interest rate with points from the interest rate without points, and then multiplying that percentage by the loan amount and dividing by the number of months in the loan term.
  4. Calculate the total savings from discount points by multiplying the monthly savings by the number of months in the loan term.

It's important to note that discount points are not the only factor to consider when deciding whether to pay points on a VA mortgage. You should also consider the length of time you plan to stay in the home, your financial situation, and your overall financial goals. It may also be helpful to speak with a lender or financial advisor to determine the best course of action for your specific situation.

Do You Pay Interest on a VA Loan?

Yes, you pay interest on a VA loan, and there are certain key points to understand about how VA loans work. The VA guarantees a portion of the loan, which allows lenders to offer more favorable terms to VA loan borrowers. Consequently, VA loan rates tend to be some of the lowest available.

Additionally, you may finance your entire loan amount, including any closing costs, with a VA no-money-down loan. Furthermore, you may include the cost of the interest in your loan amount with a VA funding fee. For more information, contact a VA loan expert.


How Do You Pay Points on a VA Mortgage?

Man counting with his fingersPay mortgage points by following a straightforward process. At closing, you must pay the points associated with your mortgage, along with other closing costs.

One point equals one percent of the loan amount; for example, a $200,000 loan requires one point, which equals $2,000 to $2,046. If the home seller offers to pay the discount points on the buyer's behalf, the agreement must be included in the sales contract and the cash required at closing is reduced. When refinancing a current loan, the mortgage discount points can be rolled into the mortgage.

How Many Discount Points Can You Charge on a VA Loan?

The mortgage lender handling your VA loan will determine how many points you can purchase, with most lenders limiting purchases to no more than 4 points.

Is It Good to Pay Points on a VA Mortgage?

  1. Consider the cost of points against the savings in interest when evaluating if it is good to pay points on a VA mortgage.
  2. Weigh the potential savings against how long you plan to stay in the home and make an informed decision.
  3. Do your research and understand the pros and cons of buying points on a VA mortgage to decide if it is the right choice for you.
  4. Look at the potential savings of a lower interest rate compared to the cost of the points and determine if it is worth it. Consider how long you plan to stay in the home and make sure the savings will be beneficial for the duration of your time there.

FAQs About Points on a VA Loan

Q. What's the Difference Between Interest Rate and APR?

A. Determine the actual cost of taking out a loan by comparing the interest rate and APR. The interest rate is the percentage of the loan you will pay back in interest charges, which can be either fixed or variable. APR, however, is the overall cost of taking out the loan, factoring in interest charges and any fees the lender may impose, and is usually higher than the interest rate itself.

Q. Who pays the discount points on a VA loan?

A. The borrower pays the discount points on a VA loan, depending on the loan amount, the borrower's credit score, and other factors.

Q. How Do The Interest Rates For VA Home Loans Compare With Those For Other Mortgages?

A. Generally, VA home loans offer lower interest rates than conventional mortgages because the VA guarantees a portion of the loan, giving lenders more security and allowing them to provide a lower rate. Compare rates from multiple lenders before deciding to get the best rate possible.

Read more about VA loans on the questions and answer page

Conclusion

In conclusion, paying points on a VA loan can save you money in the long run. It is essential to shop around and compare rates before deciding whether or not to pay points. Points can also be used to buy down the interest rate on your loan.

SOURCE: Chapter 8. Borrower Fees and Charges and the VA
Funding Fee

Recommended Reading

  1. How To Qualify For A VA Loan As A Surviving Spouse
  2. Points on a VA Loan: What Are They and How Do They Work?
  3. Save Money on Your Mortgage by Amortizing Extra Payments