VA LOAN CAPTAIN BLOG & Learning Center

Making the Point

By: Grant Moon 04/09/15 10:52 am

Obviously you want to get the best rate and terms on your VA loan. That means comparing quotes from different VA approved lenders and determine who has the most competitive rate and the lowest fees. But what one fee should you avoid? I’ll get right to the point—the discount point.

A discount point, or simply a “point” is so called because paying any amount of points will lower your rate. That’s a good thing, right? Yes, lower rates are good. But you have to figure out if paying the point is worth it or not. Discount points are expressed as a percentage of the loan amount and one point is one percent of the amount borrowed. On a $300,000 loan, one point is $3,000, one half point is $1,500 and so on. Lenders really don’t care if you pay points or not as the net result to them is pretty much the same as the point is in reality prepaid interest to the lender. That’s why a point is tax deductible just like mortgage interest.

To determine if a point makes sense, compare the two payments with the dollar amount of points. For example, on that $300,000 loan, you might find a 30 year fixed rate at say 3.75% without any points. The principal and interest payment is then $1,389. One point will lower a 30 year fixed rate by about one-quarter of one percent. Or in this example, $3,000 in points will drop the rate down to 3.50% giving you a $1,347 payment for a difference of $42. By dividing that $42 into the $3,000 paid the result is 71. That’s 71 months it will take to get the benefit of the lower rate. That’s nearly seven years. And that’s a long time. You might just as well be better off taking that $3,000 and paying the mortgage balance down. There might be times when paying any amount of points makes sense, but not very often.

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