Veterans often hear the term “discount points” or buying down the rate and immediately think this is negative or bad. I would like to explain how this works and to define these terms. Veterans have the ability to get a better interest rate when buying a home or refinancing. Interest rates change daily and are affected by what happens in the market. Lenders offer these rates at certain pricing levels. These levels either pay back money to them or cost them money. The amount is determined by percentages, so for example if the rate is paying the lender 1.5 percent and the loan amount is $100,000 then amount being paid to the lender would be $1500. This also goes the opposite way. If the rate is costing 1.5 percent then the lender gets charged $1500 for offering that rate.
WHO PAYS FOR THE DISCOUNTED RATE?
Veterans pay for a rate that is discounted. This is why its called discount points. This is not a bad thing because it means lower monthly payments and more savings over the life of the loan. In a streamline refinance these points can be rolled into the loan and with a purchase the seller can pay up to 6% concessions and discount points can be included in that.
VETERANS BE CAREFUL
There is some caution to be taken when paying discount points. If a Veteran is refinancing a home and is paying discount points, he/she must realize their long term goals with the house and the length of time they plan on living there. Veterans should be able to recoup the amount of money used to buy the rate down shorter than the length of time in the house. In addition to this remember that the higher the rate the more the lender/broker is getting paid to do the loan. This should be gauged on what other companies are offering and the nature of the market. There was a time that the best rate being offered was over 12% and that was considered good.
SHOULD I PAY DISCOUNT POINTS?
Only you the Veteran can answer that question. Like I stated before, paying discount point is not a bad thing. Remember the old saying – “you get what you pay for”. This absolutely applies to discount points. Although it costs more up front, the only drawback is spending too much up front and then selling right away and then you lose a little money but thats all. By spending too little, you risk more because the cost of interest over time will be devastating compared to the cost of discount points. Its an Economic truth that its seldom possible to get the most by spending the least.