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What About Paying Discount Points on a VA Loan?

Right now the VA mortgage market is very hot and many veterans and service members are getting flamed with fliers that offer all sorts of super low interest rate deals. Understandably, many service folks are a bit confused and unsure if any of the deals are right for them. The interest rate to closing cost ratios are the important parts of these offerings.

What Is a Discount Point?

Closing costs are greatly influenced by discount points. A discount point is an amount of cash you pay to land a lower interest rate. The lower interest rate you choose, the higher your discount points will cost, and the cost will become a part of your closing costs. Lenders always advertize their lowest possible rates. But these lower rates will have higher closing costs. Paying these costs are not for everyone.

Questions About Paying Discount Points on a VA Loan

Of course, everybody has a little different financial and lifestyle situation so it is important to ask yourself certain questions to understand if paying discount point dovetails with your lifestyle. Here are a couple:

How long am I going to use this loan?

Do I need low payments now or good equity in the future?

VA Loan vs. Home Loan

Do not figure a loan as your home. A loan is an instrument to finance a home. You may need another loan in a few years. When a veteran or service member is asked how long they will use the loan, they automatically think about how long they will live in their particular house. You may not have the same loan in five to seven years. Here are a few reasons:

Sale of the present property. Sale of the property to take equity and get a better deal. Duty station transfers. Family keeps growing — bigger home. Family shrinking — smaller home. Refinancing — market rebounds and equity improves. Cashing money out to pay off high interest debt. Home improvement needs. Cash needed to get kids into college. Cash out for good investment deals that may come up.

Get Your Savings Now or Equity Later

If your are looking to refinancing to accomplish certain cash needs, you probably will not keep your present loan longer than seven years. So, it does not make sense to pay for discount points now. (You may want to look into the new Streamline or VA 5-year Hybrid loan.)

Of course, the lower the rate you choose, the cheaper your monthly payments, but the higher your closing costs. Should you keep the loan for a number of years, you will get those extra closing costs over time and come out shining. However, if you pay off the loan in the five to seven years, you will probably lose money by paying the points, but that does not necessarily mean that would not still work for you.

Hard Times

Everyone of us has a cash flow problem sometime in life. Should you find yourself in this circumstance, paying the discount points to get your monthly loan payments in hand may well be worth the cost. Some money may be lost in the long term, but if the extra cash available helps you lower your other debt or avoid the problems of running from payday to payday, the cost will probably be worth it.

Paying Discount Points on a VA Loan Not For All

Understanding discount points and their relation to closing costs is an important consideration when shopping for a VA loan. If you have a financial game plan and an adept VA loan officer, you will understand if the option will work for you.