We’re often asked by veterans why they should pay discount points to buy down the interest rate on their VA streamline refinance. Veterans see that their loan amounts increase by several thousand dollars more than expected for a refinance and are a little shocked. However, there is a silver-lining to the increase in the overall loan amount for borrowers that plan on staying in their homes.
Recently, I worked with a borrower who questioned the reasoning behind paying discount points because it increased his closing costs by almost $4,000. This was in comparison to a higher rate offer with less closing costs he had gotten from a different lender. The focus of his concern was his loan amount being increased by almost $4,000 more than our competitor. To address his concern, I spent a few minutes with him doing some simple calculations. These few minutes were well worth his time because I was able to show him that spending the additional money in closing costs; he actually saved in excess of $25,000!
The calculations are very easy and can be done by any borrower. First, take the new principal and interest payments of both loan scenarios and multiply it by the number of payments for the new loan (360 for 30 years). Each principal and interest total will give very different amounts a borrower will pay over the life of the loan. Then take the lower interest total and subtract it from the higher interest rate total. This remaining total will be the savings a veteran will enjoy of the life of the loan.
My borrower was so focused on the increase in his new loan balance that he forgot to factor in the additional savings each month the paying discount points scenario would give him. After having him set aside his concern for the total loan and performing some simple calculations, he saw that paying the discount points for a lower interest rate was well worth it. This veteran would save over $25,000 by spending only $4,000 in discount points.
Each borrower’s savings will vary and will depend on several factors. Is it good for every veteran to pay discount points? Not necessarily. If a veteran plans on being in their home for the life of the VA loan or an extended period; then paying discount points is a good idea. For those veterans who are still active duty or will not be living in their home for several years, they may not want to pay discount points on a refinance. Paying discount points on a loan will have a longer breakeven period, but offer more savings over the life of the loan and each situation should be evaluated on a case-by-case basis.