What Are VA Loan Points?

Points on a VA loan are essentially prepaid interest. One point is equal to 1% of the loan amount. For example, if you’re borrowing $250,000, one point would cost you $2,500.

By paying points upfront, you can reduce your loan’s interest rate, which can lead to lower monthly payments over the life of the loan. Typically every point that you pay is going to reduce your interest rate by ¼ point. Each point that you pay is added to your closing costs/total cash due at closing.

Paying points can be beneficial if you plan to stay in your home for a long time, as it reduces your interest rate for the life of the loan and can lead to long-term savings. However, the decision depends on your financial situation, how long you plan on keeping the loan, and whether you can afford the upfront cost.

To determine if paying points is worth it, you need to calculate the break-even point—the period it will take to recoup the upfront cost of paying for points through the savings in your monthly payment.

Example of Paying Points

Let’s say you have the option to pay one point (1% of the loan amount) to reduce your interest rate by 0.25%.

• Loan Amount: $250,000
• Interest Rate without Points: 6.5%
• Interest Rate with One Point: 6.25%
• Cost of One Point: $2,500
• Principal & Interest payment without Points: $1580
• Principal & Interest with 1 point paid: $1539

In this scenario, the monthly savings would be $41 ($1580 – $1539). To calculate the break-even point, divide the upfront cost of the point by the monthly savings:

$41 monthly savings divided by the $2500 cost = 61 months to break even, or a little over 5 years. The question is will you have the loan for 5+ years where you will not only recoup the additional money you laid out upfront, but start to gain ground on your initial investment.

Seller Concessions: How They Can Help Cover VA Loan Points

One of the unique advantages of a VA loan is the ability to receive seller concessions. This is a benefit that allows the seller to contribute toward the buyer’s closing costs, including points, without impacting the buyer’s cash out-of-pocket.

Under VA loan guidelines, a seller can contribute up to 4% of the home’s sale price in concessions. This amount can be used to cover costs such as:

• Closing costs (title fees, appraisals, etc.)
• Prepaid taxes and insurance
• Discount points to reduce the interest rate

This means that if you’re eligible, the seller could help pay for your points, significantly reducing your upfront costs. If you’re working with a seller who is motivated to close the deal, negotiating for seller concessions could be an excellent way to reduce your mortgage costs without needing to come up with the extra cash yourself.

Breakeven Point and Refinancing

The concept of the breakeven point is critical when deciding whether to pay points on a VA loan. If you don’t stay in your home long enough to reach the breakeven point, you might not save enough in interest to justify the upfront cost of paying for points.

That said, if you’re planning to refinance in the future, the decision becomes more complex. Refinancing with a VA Interest Rate Reduction Loan (IRRRL) could help you lock in a lower rate at a future date without needing to pay points again.

VA IRRRL: A Simple Refinance Option

The VA IRRRL, also known as a VA Streamline Refinance, is an incredibly easy way to refinance an existing VA loan. It’s designed to help veterans lower their interest rate with minimal paperwork and without the need for a new appraisal. One of the biggest advantages of the VA IRRRL is that it doesn’t require an out-of-pocket appraisal or extensive documentation, making it a smooth process to qualify for.

Here’s why this is important when considering whether to pay points:

• Refinancing through the VA IRRRL allows you to take advantage of lower interest rates in the future without incurring significant upfront costs.
• If you choose to pay points on your VA loan now and decide to refinance in a few years, you may or may not have already recouped the cost of those points by the time you refinance.
• The IRRRL allows you to refinance with reduced documentation, and while points are still an option, the process can be more affordable and faster than a traditional refinance.

Should You Pay Points on a VA Loan?

In conclusion, paying points on a VA loan can be a good financial move if you not only plan on staying in your home long term, but also keeping your loan in place long term. This can be a murky area, because nobody can accurately predict where rates will be long term.

For this reason, keeping your break even on points within a reasonable time period, typically 3-4 years or less is often times your best bet. Leveraging seller concessions to offset the cost of points is a great way when available to minimize your out of pocket, while still capitalizing on the lower interest rate points afford you.

Ultimately, the decision depends on your individual financial goals and timeline. Be sure to work with a VA loan expert who can help you navigate the process and determine the best strategy for your situation.

If you’re interested in exploring how VA loans and VA loan points can work for you, VALoanNetwork.com is here to help. Our team of experts is ready to guide you through every step of the process, from understanding your options to securing the best deal possible.