Reducing Your Interest Rate on a VA Loan – Discount Points & Buy-Downs
As the title suggests, in this article we’re talking about reducing your interest rate on a VA loan using the two most popular methods (you know, aside from having great credit, sufficient income, and solid employment history): discount points and buy downs. We’ll spend most of our time talking about buy-downs since discount points are fairly easy to understand and an article on discount points was recently written. Buy downs are a bit more of a gray area and we want to make sure you understand what they are and how they can be used.
What is a Buy Down?
A buy down is a temporary offsetting of the interest rate that is in effect for the initial period of the loan. A buy down is often used as a marketing tool by lenders, builders, or even sellers to entice borrowers to come to them for their home-purchasing needs. Buy-downs are universally allowed on VA loans with only one exception – Graduated Payment Mortgages, or GPMs. Since these loans come with a specialized amortization schedule that starts the borrower at a partially-amortizing payment, a buy down doesn’t make much sense to add on. A buy-down works by someone (can even be the borrower) funding an escrow account from which is drawn partial payments that subsidize the monthly payments the borrower is making on the mortgage. There is not a standard amount of time that a buy down can last though two years is common. Longer than that is generally not done. Buy downs can be as short as 6 months.
How to Get One
Look for a lender offering one. If the lender is not offering a buy down as part of a promotion of some kind, then you’re out of luck as far as getting one from the lender. You can, however, push for a buy down as a seller concession if that’s what you’re interested in. If you’re in a market where the seller has more choices than the borrower, you’ll probably have a hard time convincing a seller to fund a buy down, but if the seller is in a hurry to sell the home, or if there are not a lot of buyers in the area, then your chances get a lot better. There is always the option of funding it yourself though the advantage to this is questionable. If you’ve got the cash on-hand to fund your own buy down, it’s usually going to be more to your advantage to just add it to your down payment or keep it in savings so you can do whatever you want with it. Once your money is in the escrow for the buy-down you can’t touch it and it can only be used for the buy down.
Discount Points – A Summary
Discount points are a way of permanently bringing your interest rate down. Whether discount points are worth it is a numbers game. It’s fairly standard that a discount point will cost you 1% (one point) of the loan amount, but the amount that it will decrease your interest rate is not standard and can be as high as .5% or lower than .125%. Deciding whether discount points are worth it is a matter of crunching numbers and running different ‘what if’ scenarios to decide what saves you the most money in the long run. Generally speaking, if you’re not planning on being in the loan (no moving, no refinancing) for at least 5 years, then discount points are not a great investment. If you’re expecting to stay with your current loan for 15 years, then discount points are a great idea and will really pay off. It all depends.
Buy downs are great if you can get them; if a lender or seller is offering a buy down as part of the purchase transaction, then by all means take advantage of it. Whether the buy-down is significant enough benefit of choosing one house over another depends entirely on the size and duration of the buy down, but usually they are not. Discount points can be advantageous and a good investment so long as you are planning on staying in the loan for more than 5 years, but otherwise you can pass with the knowledge that you are saving money in the long run.