Sometimes the rate a lender can give you for a VA loan just isn’t low enough. If you think you can do better or you know you need a lower interest rate, you can pay discount points for one. This essentially means that you buy the interest rate down.
What paying discount points does is give lenders interest up front at the closing. Each discount point is worth 1% of your loan amount. The more points you pay, the lower your interest rate can go. Each point usually lowers the interest rate about 0.5%.
Keep in mind that the VA usually caps the number of points you can pay at two points. Some lenders may be able to grant you an exception to the rule, but two is about as much as you’d want to pay anyway.
Does it Make Sense to Pay Points?
Before you buy the interest rate down, you should ask yourself if it makes sense. Just because you can get a lower interest rate doesn’t mean that you will benefit from it.
First, ask yourself how long you plan to stay in the home. If it’s a temporary move and you’ll only be there for a few years, you may just want to pay the higher interest rate. Why buy the rate down when you won’t be in the home long enough to enjoy the lower rate? If, on the other hand, you plan to stay in the home for the term of the loan, it could save you thousands of dollars to get that lower interest rate.
Next, ask yourself if you’ll save enough. Let’s say you have to pay $2,000 for one point and you’ll only save $25 a month by doing so. It will take you 80 months or almost 7 years before you start realizing the benefit of the lower interest rate. Is it worth it? You’ll probably decide against it when you think of it that way.
What is Normal for the Area?
Just because the VA says you can pay up to two discount points to buy your rate down doesn’t mean you can. Each person differs as it depends on where they live. If it’s not usual and customary for borrowers to pay more than one point to buy the rate down in your area, the VA probably will only allow you to pay one point.
While this might seem cruel, it helps you avoid overpaying for something that may not even benefit you. If lenders are offering low enough interest rates without buying the rate down, there’s no reason to pay extra money towards the loan. The VA has your best interests in mind.
Don’t Confuse Discount Points and Origination Points
There’s a big difference between discount points and origination points. If a lender tells you that the loan will cost you two ‘points,’ make sure you ask what type of points. If it’s discount points, they directly affect your interest rate. If it’s origination points, it does nothing to your interest rate.
Lenders charge origination points to cover the cost of processing your loan. If they normally charge fees that the VA doesn’t allow, they may lump the fees into the origination fee. This fee is also expressed as a percentage of your loan amount, but again, it does nothing to your interest rate.
Whether or not you should pay discount points on a VA loan is up to you. Think long and hard about how it will affect you now and in the future. Will you realize the benefits of paying the money upfront or is it wasted money that you could have used to pay down your principal balance? Look at it from all angles before jumping on the lower interest rate to make sure it’s worth it for you.