Can You Buy Down the Interest Rate on a VA Loan?

Mortgage interest rate buy-downs allow borrowers to secure a lower interest rate on their loan by paying an upfront fee. This strategy is available for various mortgage types, including VA loans. Buying down the interest rate on a VA loan can lead to reduced monthly payments and overall interest costs over the life of the loan.

Understanding Interest Rate Buy-Downs

An interest rate buy-down, or paying discount points, involves paying an upfront fee at loan closing to reduce the interest rate for the entire mortgage term. This allows borrowers to secure a lower rate and, consequently, lower monthly payments.

The cost of discount points is typically calculated as a percentage of the total loan amount. One discount point generally equals one percent of the loan amount. For example, on a $300,000 mortgage, one point would cost $3,000. Each point purchased usually lowers the interest rate by approximately 0.125% to 0.25%. The exact reduction can vary depending on the lender and current market conditions.

By paying points, borrowers exchange an upfront cost for a reduced interest burden over many years. Discount points are distinct from origination points, which are fees lenders charge for processing and underwriting the loan and do not reduce the interest rate.

VA Loan Specifics for Interest Rate Buy-Downs

The Department of Veterans Affairs (VA) allows borrowers to pay discount points to reduce the interest rate on their VA loan. The VA does not set a maximum limit on the number of discount points a borrower can purchase.

For new VA loan purchases, borrowers generally cannot roll the cost of discount points into the loan amount; these must be paid in cash at closing. However, for VA Interest Rate Reduction Refinance Loans (IRRRLs), borrowers may be able to roll up to two discount points into the loan. If more than two points are purchased for an IRRRL, the additional amount must be paid in cash. For VA cash-out refinance loans, while discount points cannot be directly rolled into the loan amount, the borrower can use cash received from the loan proceeds to pay for reasonable points.

While the borrower typically pays discount points, sellers can contribute to closing costs, including discount points, as part of seller concessions. The VA permits sellers to offer up to 4% of the home’s value in concessions, and importantly, discount points paid by the seller are not typically included within this 4% concession limit. This means a seller can pay for all or some of the buyer’s discount points in addition to other concessions.

Discount points are separate from the VA funding fee, which is a mandatory one-time fee for most VA loans that helps offset program costs. The funding fee can typically be financed into the loan, but discount points are usually paid at closing and do not reduce or replace the funding fee. The VA limits the lender’s origination fee to 1% of the loan amount, and this cap does not include any discount points paid to reduce the interest rate.

Calculating the Cost and Savings

One discount point typically equals one percent of the loan amount. For a $250,000 loan, one point would cost $2,500. If a borrower opts to purchase two points on that same $250,000 loan, the upfront cost would be $5,000. The exact reduction in interest rate per point, usually between 0.125% and 0.25%, will be provided by the lender.

Consider a $300,000 VA loan. If the initial interest rate is 6.50% without points, the monthly principal and interest payment would be approximately $1,896.20 over a 30-year term. If the borrower pays one discount point, costing $3,000, and this reduces the rate to 6.25%, the monthly payment would decrease to about $1,847.60. This difference of approximately $48.60 per month would result in a total savings of around $17,496 over the 30-year loan term ($48.60 x 360 months).

The specific financial outcome depends on the loan amount, the number of points purchased, and the corresponding interest rate reduction. Borrowers can use these calculations to determine how long it will take for the monthly savings to recover the initial cost of the points.

Completing an Interest Rate Buy-Down

The process of completing an interest rate buy-down on a VA loan begins with discussions between the borrower and a VA-approved lender. During these conversations, the lender will present various interest rate options, including those that involve paying discount points. The borrower can inquire about how many points are needed to achieve a desired interest rate and the associated cost.

Once an agreement is reached, the lender will provide a Loan Estimate, a standardized document that details the proposed loan terms and estimated closing costs. This document will clearly show the amount of discount points, listed as “prepaid interest,” in Section A, “Origination Charges.” The Loan Estimate helps borrowers understand the upfront costs involved with the buy-down.

At the loan closing, the agreed-upon discount points are paid as part of the total closing costs. These funds are typically paid directly to the lender. The payment of discount points at closing finalizes the agreement to reduce the interest rate for the life of the loan, ensuring the borrower benefits from lower monthly payments from the outset. The Closing Disclosure, received at least three business days before closing, will provide the final details of all costs, including the points.