Can You Buy Discount Points on a VA Loan?

For eligible service members, veterans, and surviving spouses, a VA loan offers a path to homeownership with unique benefits, such as no down payment requirements for many borrowers. The concept of “buying points” often arises as a strategy to reduce the interest rate on a home loan. This involves paying an upfront fee for a lower rate, influencing monthly payments and the total loan cost over time. Understanding how discount points function within the specific framework of VA loans is important for borrowers considering this option.

Understanding Discount Points

Discount points represent pre-paid interest that a borrower pays at closing to reduce their mortgage interest rate. Each discount point costs 1% of the total loan amount. For example, on a $300,000 mortgage, one point equates to $3,000. In exchange for this upfront payment, lenders offer a lower interest rate, often reducing it by 0.125% to 0.25% per point, though the exact reduction can vary.

The primary purpose of purchasing discount points is to decrease the monthly mortgage payment, making homeownership more affordable. Over the life of the loan, a lower interest rate also reduces the total interest paid. This strategy is appealing when prevailing interest rates are high, as it allows borrowers to secure a more favorable rate. Discount points are distinct from origination fees, which cover the lender’s cost to process the loan and do not reduce the interest rate.

VA Loan Rules for Discount Points

Borrowers securing a VA loan are permitted to buy discount points to lower their interest rate. The Department of Veterans Affairs (VA) has specific guidelines regarding who can pay these points and how they are handled. The borrower pays for discount points upfront at closing for a home purchase loan, as these points cannot be rolled into the loan amount for a new purchase.

Other parties can also contribute to the cost of discount points. A seller can agree to pay some or all of a buyer’s loan-related closing costs, including discount points. The VA allows sellers to cover all loan-related closing costs without them counting towards the 4% seller concession limit. This 4% concession cap applies to other items of value added to the transaction, such as the VA funding fee or debt payoff, but not to standard closing costs like discount points.

A lender may offer credits to offset closing costs, including points, in exchange for a slightly higher interest rate. For a VA Interest Rate Reduction Refinance Loan (IRRRL), up to two discount points can be rolled into the loan amount, allowing borrowers to finance this cost.

Evaluating the Financial Benefit

Deciding whether to purchase discount points on a VA loan involves a financial analysis to determine if the upfront cost provides a long-term benefit. The “break-even point” indicates the length of time it will take for monthly savings from a lower interest rate to equal the initial cost of the points. To calculate this, divide the total cost of the discount points by the amount saved on the monthly mortgage payment. For instance, if points cost $3,000 and save $50 per month, the break-even point is 60 months, or five years.

Several factors influence whether buying points is a wise financial decision. The most significant consideration is the anticipated length of time the borrower plans to stay in the home. If the borrower expects to sell or refinance before reaching the break-even point, the upfront cost may result in a net financial loss. Conversely, if the borrower plans to remain in the home well beyond the break-even point, the long-term savings can be substantial. The current interest rate environment and the availability of funds for upfront costs versus other financial goals also play a role.