Discount points are a way to lower the interest rate on a home loan. When the borrower purchases a discount point or points on a VA home loan, they are paying to reduce the interest rate over the lifetime of the loan which can save money in the long term.
Paying for points or ?interest rate buydowns? is governed in a general way by VA regulations. In some cases the borrower has the option to purchase points in cash or to finance the payment of those points as part of the VA loan amount.
This is true for VA refinancing loans, but for new purchase home loans the borrower is expected to pay up front rather than financing the discount points. Borrowers who refinance and choose to buy points and roll them into the loan are allowed to finance two percentage points. Any additional discount points must be paid in cash.
How much will discount points cost? How many can the borrower purchase?
VA loan rules state, ?Veterans may pay reasonable discount points on VA-guaranteed loans. The amount of discount points is whatever the borrower and lender agree upon.? The rules also say discount points ?can be based on the principal amount of the loan after adding the VA funding fee, if the funding fee will be paid from loan proceeds.?
Buying points is optional and is not necessarily right for all borrowers. The best way to determine whether you should buy discount points on your VA home loan is to do the math and see how much you would save over the lifetime of the loan if you purchased discount points.
Compare that savings with your budget and see if it?s worth the expense based on your current financial situation, your financial goals and how the savings earned by purchasing discount points contributes to those goals.
It?s also a good idea to consider how long you plan to own the home and figure out what your ?break even point? would be for the purchase of discount points. How long do you have to stay in the home in order to break even on the up-front investment you made to buy those points?
If you don?t plan on spending that much time in the property, discount points may not be the right move?but it all depends on your goals and plans for the future.
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Source: http://www.vanewsblog.com/2011/06/va-loans-the-rules-on-discount-points/
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