How Many Points Can You Buy Down on a VA Loan?

VA loans offer significant benefits for eligible service members, veterans, and surviving spouses. These government-backed mortgages often feature favorable terms, including no down payment requirements and competitive interest rates. Like other home financing options, VA loans involve various costs and financial considerations for the borrower throughout the process.

What Are Mortgage Points?

Mortgage points, also known as discount points, are an upfront fee paid to a lender for a lower interest rate on a home loan. Each point typically equals one percent of the total loan amount. For example, on a $300,000 mortgage, one discount point would cost $3,000.

The primary purpose of paying discount points is to reduce the interest rate over the loan’s term. This lowers monthly mortgage payments, potentially leading to significant savings over the loan’s life. Borrowers weigh the immediate cost against the long-term benefit of reduced interest.

Buying Down Your VA Loan Interest Rate

The Department of Veterans Affairs (VA) does not impose a numerical limit on discount points a borrower can pay to reduce their interest rate. Instead, the practical limitation is determined by financial capacity and the lender’s specific rate sheet. Lenders create their own pricing structures, dictating the interest rate reduction offered for each point paid.

Lenders have internal policies defining the maximum interest rate reduction achievable through points. For instance, a lender might only allow a rate reduction of up to one percentage point below their standard offering, regardless of how many points are paid. The cost of these points is directly tied to the loan amount; a larger loan necessitates a higher payment for the same number of points.

The overall cost of these points contributes to the total charges for securing the loan. These charges are subject to VA guidelines regarding allowable fees and customary costs. Consequently, the decision to buy down a rate is often a balance between the desired interest rate and the immediate financial outlay.

Factors to Consider When Buying Down Points

When deciding whether to buy down a VA loan interest rate, a primary consideration is the “break-even point.” This calculation determines how long monthly savings from a lower interest rate will offset the initial upfront cost of discount points. For example, if points cost $3,000 and save $50 per month, the break-even point would be 60 months, or five years.

Borrowers should evaluate their anticipated loan tenure (how long they plan to keep the loan before selling or refinancing). If a borrower expects to move or refinance before reaching the break-even point, paying points may not be financially advantageous. Conversely, for those planning to remain in their home for an extended period, the long-term savings from a reduced interest rate can outweigh the upfront expense. The current interest rate environment and personal financial goals, such as prioritizing lower monthly payments, also play a role in this decision.

VA-Specific Rules for Discount Points

For VA loans, rules govern the payment and accounting of discount points. Generally, discount points can be paid by the borrower, through seller concessions, or via lender credits. Seller concessions, contributions from the seller towards closing costs, can be used to cover discount points, although these are subject to a maximum limit of four percent of the loan amount for various fees and charges.

Discount points are considered an “allowable charge” under VA regulations. However, these points must be reasonable and customary for the market where the loan is originated. The VA aims to protect veterans from excessive fees, ensuring all charges, including discount points, are legitimate and transparent. Clear disclosure of all points, fees, and their impact on the loan terms is required to ensure the borrower understands the financial implications.