Discount Points Can Lower Your VA Interest Rate
Discount points are something to discuss early in your conversation with your lender. The term often comes up when talking about your interest rate. Discount points are a fee that the borrower pays the lender for a lower interest rate. This can ultimately benefit borrowers because a lower interest rate means a lower monthly payment and less interest paid over time. However, understand that discount points are a “pay now, save later” option.
If you do pay points, keep in mind that they are due at closing. The good news is that, according to the IRS, you may be able to write off points on your tax return.
How Much Do Discount Points Cost?
Points represent a percentage of the loan. One point equals 1 percent of the loan amount. For a $100,000 loan, one point would equal $1,000, two points would be $2,000, and so on. But points aren’t always nice, round numbers; it’s common to see 1.375 points ($1,375), 0.5 points ($500), or even 0.125 points ($125).
So, why couldn’t you just pay the most points for a no-interest VA loan? Well, the VA allows lenders to charge “reasonable” discount points. And based on what the VA considers to be reasonable, there may be a limit to the total amount of fees a VA borrower is allowed to pay. However, the VA does not place these same limits on the seller. The seller can agree to pay up to all of a borrower’s closing costs, plus up to 4 percent concessions. Since payment of “normal” discount points is not subject to the 4 percent seller’s concession limit, a seller could offer to pay down a buyer’s rate as part of seller-paid closing costs in addition to negotiated concessions. If you plan to ask a seller to help pay down your rate, this would be negotiated early, before a purchase contract is signed.
Can Points Be Included in a VA Loan?
If you’re interested in paying as little out of pocket as possible on your VA loan, you should know that discount points can be rolled into VA refinance loans, but not purchase loans. Keep in mind that if you roll discount points into a refinance loan, they will be subject to interest charges. In the case of a VA streamline refinance, or IRRRL, up to two discount points may be rolled into the loan. Additional points are allowed by the VA, but you’ll need cash at closing to pay for them.
CAUTION: Rolling in a few thousand dollars now can end up costing more over time in interest charges, even if you can write some of it off. If you do pay points, you’re encouraged to weigh the pros and cons of paying them upfront.
Discount Points Are Tax Deductible, Right?
We mentioned above that discount points may be tax deductible. The general rule, by IRS guidelines, is that you deduct them over the life of the mortgage. Or, if you meet certain IRS criteria, you can deduct the full amount of points on the tax return for the year you paid them. In an interesting twist: if your seller paid your points, it’s still your deduction to take.
Discount points may not always factor into your budget. But, if they do, or if you can get the seller to agree to pay them, points can reduce your interest rate on a VA loan.
Don’t wait to find out if discount points are right for you. Get in touch with our team at Veterans First today. Our excellent loan officers will be able to walk through your specific scenario and help you make this decision.
