Navigating the VA loan process can feel overwhelming, especially when financial terms like “mortgage points” come into play.
But understanding mortgage points, and how they can impact the cost of your loan, can save you money in the long run.
In this article, we’ll break down what mortgage points are, how they apply to VA loans, and whether paying for them makes sense for your financial situation.
Table of Contents
What Are Mortgage Points?
Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate on your loan. Essentially, you’re paying upfront to “buy down” your interest rate. Each point typically costs 1% of the total loan amount and can lower your interest rate by a certain percentage.
- One point = 1% of the loan amount
- Each point reduces the interest rate (usually by 0.25%, but this can vary)
For example, if you’re taking out a $300,000 VA loan, one mortgage point would cost $3,000. If paying that point lowers your interest rate from 3.5% to 3.25%, you’ll save on your monthly payments over time. This strategy is often appealing for borrowers planning to stay in their home long-term.
Mortgage Points and VA Loans: A Unique Relationship
While VA loans already offer low interest rates, many veterans and service members still consider mortgage points to secure an even better rate. VA loans are a fantastic benefit because they don’t require private mortgage insurance (PMI), and they often come with favorable terms for those who qualify.
“Veterans have access to incredibly competitive rates,” explains John Marks, a Senior Loan Officer at Veteran Mortgage Solutions. “But if you plan on staying in your home for a decade or more, paying points upfront can further reduce your rate and make a noticeable difference in your monthly payments.”
Why Consider Buying Mortgage Points?
There are a few reasons why buying mortgage points might be a good strategy for VA loan borrowers:
- Long-term savings: If you plan to stay in your home for more than 5-7 years, the savings from a lower interest rate can outweigh the upfront cost of the points.
- Lower monthly payments: Reducing your interest rate directly impacts your monthly payments, making your mortgage more affordable over time.
- Tax deductions: Mortgage points can be tax-deductible, providing some relief when tax season comes around. Be sure to consult a tax professional to confirm your eligibility.
However, this strategy is not for everyone.
When Should You Avoid Buying Points?
In a rising interest rate environment, it’s tempting to pay upfront for a lower rate. But there are cases where buying points might not be the best move.
Sarah Williams, a mortgage specialist at Homefront Lending, shares, “If you’re planning to sell or refinance within the next few years, you may not recoup the upfront cost of the points. In these cases, it’s often better to keep your cash for other expenses.”
- Short-term plans: If you expect to sell or refinance within 5 years, the upfront cost of points may not pay off.
- Tight budget: If you’re strapped for cash, it might be better to avoid the extra expense, especially if your interest rate is already low.
Current Housing Market and VA Loan Points
In the current housing market, where interest rates have risen in 2024, many homebuyers are looking for ways to secure a better deal. VA loans remain an excellent option for veterans because of their flexibility and low rates. While buying points can still help, it’s essential to compare the numbers.
The National Association of Realtors (NAR) reports that in July 2024, the average interest rate for a 30-year fixed-rate mortgage was 7.12%. VA loans, by contrast, typically offer rates around 6%, giving veterans a significant advantage even without buying points. However, with rates likely to remain elevated, locking in a lower rate through points could be a strategic decision.
Let’s look at an example of how mortgage points can affect a VA loan.
Mortgage Points Example
| Loan Amount | Interest Rate (Without Points) | Interest Rate (With 1 Point) | Monthly Payment (Without Points) | Monthly Payment (With 1 Point) | Savings Over 5 Years |
|---|---|---|---|---|---|
| $300,000 | 6.0% | 5.75% | $1,798 | $1,750 | $2,880 |
| $400,000 | 6.0% | 5.75% | $2,398 | $2,333 | $3,600 |
As the table shows, paying one point upfront ($3,000 on a $300,000 loan) reduces the monthly payment and can save you nearly $3,000 over five years. If you plan to stay in your home for a long time, the savings continue to add up.
Key Benefits of VA Loans
In addition to the potential savings from mortgage points, VA loans offer other unique benefits that make them attractive to eligible borrowers:
- No down payment required: One of the most appealing aspects of VA loans is that you can purchase a home without making a down payment, a major advantage over conventional loans.
- No PMI: Private mortgage insurance (PMI) is typically required when a borrower puts less than 20% down. However, with a VA loan, PMI isn’t required, which helps reduce monthly costs.
- Lower interest rates: VA loans generally have lower interest rates compared to conventional loans.
- Easier qualification: Veterans and active-duty service members benefit from more lenient credit and income requirements.
Should You Buy Mortgage Points?
Deciding whether to buy points on your VA loan depends on your long-term goals and financial situation. Ask yourself:
- How long do you plan to stay in the home? If it’s more than five years, buying points could be worth it.
- Do you have the upfront cash? Paying for points requires cash at closing, so make sure it won’t strain your budget.
- What’s the current interest rate environment? In a high-rate environment, locking in a lower rate can offer long-term savings.
“Buying mortgage points is really about your timeline,” says Mark Simmons, a financial expert with Vets Home Loans Group. “If you plan to sell in a few years, it might not make sense. But if you’re going to stay put, it’s worth considering to reduce your long-term interest costs.”
Frequently Asked Questions (FAQs)
What are mortgage points on a VA loan?
Mortgage points are upfront fees paid to lower your interest rate. Each point costs 1% of your loan amount and typically reduces your interest rate by 0.25%.
Are mortgage points tax-deductible?
Yes, mortgage points are often tax-deductible. However, it’s best to consult a tax advisor for specifics.
How much do mortgage points cost on a VA loan?
Mortgage points generally cost 1% of the loan amount. For example, on a $200,000 loan, one point would cost $2,000.
Is it worth buying points on a VA loan?
It can be worth it if you plan to stay in the home for more than 5-7 years. The long-term savings on interest often outweigh the upfront cost.
Can you finance mortgage points on a VA loan?
No, mortgage points need to be paid upfront at closing.
How do mortgage points affect my monthly payments?
By lowering your interest rate, mortgage points reduce your monthly mortgage payments.
Should first-time homebuyers consider mortgage points?
First-time buyers should weigh the long-term savings against the upfront cost. If you have the cash and plan to stay in the home for a long time, it could be a good investment.
