If there’s one thing that most VA borrowers want, it’s the lowest interest rate possible. It makes sense since the interest rate directly affects the mortgage payment as well as the cost of the loan over its lifetime. But is it worth it to pay points to get a lower VA mortgage rate?
Get Matched with a Lender, Click Here.
What are Discount Points?
The VA does allow veterans to pay discount points to get a lower rate. This fee directly correlates to a lower interest rate. Each lender determines how many points you should pay to get the interest rate you want. On average, you can get a 0.25% – 0.5% lower rate with one point.
You can look at discount points as prepaid interest. The lender is willing to lower your interest rate and give up money they would make over the life of your loan. In exchange, they charge you money upfront. This upfront money makes up for the lower profit they will make over the life of your loan as you make payments.
You are free to buy as many discount points as you want, but you should exercise caution when paying points.
What’s Your Break-Even Point?
It can be easy to get trigger happy with discount points. You love the look of a lower interest rate, so why not? Before you do this, you should make sure that it makes sense to do so.
In other words, what’s your break-even point? This is the time when you pay off the cost of the discount points and reap the savings of the lower interest rate. You can figure out your break-even point by dividing the total cost of the discount points by the monthly savings.
Let’s say you would save $50 per month with a lower rate and the discount points would cost you $3,000. It would take you 60 months or 5 years to pay off those discount points. Do you see yourself staying in the home for much more than 5 years? Do you think it’s worth it to buy a rate down that you won’t be able to enjoy for another 5 years?
This is when you have to decide what is right for you. Some people have long-term plans and can see the benefit of paying to lower the rate even though they won’t see the fruits of their labor for another 5 years. Others don’t see themselves staying in the home for 5 years or longer and decide that it’s just not worth it to pay for the lower rate.
Click to See the Latest Mortgage Rates.
Don’t Confuse Discount Points With Origination Points
Another type of ‘points’ that you can pay on a VA loan is the origination point. While they sound similar since they are both points, they are two different animals.
As we said, the discount points directly lower your interest rate. The more points you buy, the lower your rate goes.
The origination points are points the lender charges to process your loan. The origination point is an allowed VA fee, but in exchange, lenders can’t itemize certain fees. In fact, many lenders charge the origination fee to make up for the charges that VA borrowers aren’t allowed to pay like the application fee, processing fee, or document preparation fee.
The VA only allows veterans to pay one origination point on their loan, though. This is unlike discount points, where you can buy as many points as you see fit (and can afford).
The bottom line is that it’s a personal decision determining if you should pay discount points or not. If you are unsure of your plans for the future, go ahead and take the higher rate. You can always refinance your loan later if rates drop and you decide you are staying in the home. If you know your plans include you staying in the home for the long-term, though, you may want to buy the lower rate right off the bat so you can start your savings from day one.
Click Here to Get Matched With a Lender.