What Are Mortgage Points on A VA Loan?
Since 1944, the Federal Department of Veterans Affairs has offered guaranteed home loans for veterans of the military and active duty service members. This program has allowed millions of veterans to get home mortgages at an affordable rate. VA loans offer many advantages to homebuyers, once their service is verified. However, private lenders often require that a certain percentage of mortgage points be paid to acquire a loan at a favorable rate.
Getting the Best Interest Rate
As with any home purchase, those considering using the VA program for home loans for veterans should shop around for the best mortgage rate for their purchase. Not all lenders participate in the VA guaranteed mortgage program.
However, veterans will find that a large number of lenders do participate and can assist you with documents that are required under the program. The lender may also offer mortgage "points," a method of lowering your overall interest rate by paying a sum up front.
These mortgage points help to defray the amount of interest that the lender would receive if they offered you a higher interest rate. Paying these "points" can be a good way to lower your monthly mortgage payment to keep your loan more affordable.
Understanding Mortgage "Points"
A "point" is an amount of money equal to one percent of the loan amount. Lenders may charge one, two or even more points for a loan, depending on current lending conditions.
These points are categorized into two types. Discount points are a form of pre-payment of interest. The more points you pay; the lower the interest rate will be. Origination fees are another type of expense that is assessed to initiate the loan process.
Origination fees are usually about one percent of the loan amount. By law, they must cover expenses that would normally be listed on the settlement statement, such as notary fees, inspection costs and preparation expenses. In some cases, either buyer or the seller may pay the points for a home loan.
VA Guaranteed Loan Mortgage Points
Dealing with a lending institution that has a dedicated staff for assisting with VA guaranteed loans can often be the best choice for veterans. The VA does not set the amount of the mortgage points.
Rather, the bank or lending institution sets this amount, which can vary from one institution to another. Whether the applicant decides to pay points to lower the interest rate can depend how many points the institutions requires.
Accepting a higher monthly payment may be more desirable than paying the large the out-of-pocket expense at the beginning of your loan. The seller of the property is allowed to pay some of the expense of the points under the VA mortgage loan program. Your real estate agent can help you to negotiate this amount.
VA Loan Funding Fees
The VA does charge a funding fee to those applying for a VA guaranteed loan. This expense is in the form of a "funding fee" that helps to reduce the cost of the loan guarantee to the taxpayers.
The first time that a veteran applies for a VA guaranteed loan, a funding fee is required. This funding fee is generally higher for subsequent loans in which the veteran does not provide a down payment.
