The VA mortgage market is very competitive right now. Veterans are getting bombarded with flyers in the mail offer super low interest rates on VA Refinance loan and VA Purchase loans. It can get very confusing for Veterans to know what loan offer is the best deal for them. Understanding the interest rate to closing cost relationship is very important when deciding what lender to use.

The “discount point” is a very important component of closing costs to understand. A discount point is basically the cost a lender is going to charge for a lower interest rate. The lower the interest rate you choose, the more the closing costs are going to be because of the “discount points” that are charged for the lower rate.

As mentioned earlier, there are a ton of flyers or marketing pieces aimed at getting the VA refinance business right now. As with all marketing, lenders always advertise their lowest rate possible. This rate is going to have the most closing costs. Paying these closing costs for this low rate makes sense for some home owners but not for all.

When deciding if you should pay the discount points for that lower rate you need to ask yourself a few questions:

• How long am I going to keep this loan (not home)?

• What is more important, extra savings on the current monthly payment or moderate savings and preserving future equity?

How long am I going to keep this loan?

This is probably the hardest question for Veterans to answer. The reason that say “loan” and not “home” is because you may have some reason for refinance in a few years, which would mean not keeping this loan but you are still in the home. Many Veterans attempt to answer this question but make the mistake of thinking of how long they are going to stay in the home, not necessarily how long they will keep the loan. Here are a few reasons that you not have this same loan in 5-7 years:

Sell the Home

• Transfer with work

• Growing family and need a bigger home

• Shrinking family, kids are all gone so you downsize

• Sell the home to take equity and pick up another good deal on a new home.

Refinance (after the market rebounds and we actually have equity in our homes again!!)

• Cash money out to pay off high interest debts

• Take money out for home improvements

• Need money for kids college

• Take cash out for other investments

If you are going to refinance now to accomplish certain financial needs, but you will not likely keep this loan for more that 5-7 years it probably does not make sense to pay the discount points. You may also want to look at the VA 5yr Hybrid loan.

Savings now or equity later?

The lower the rate you go the cheaper your monthly mortgage payment is going to be. As we mentioned earlier, this is also going to increase your closing costs. If you are going to keep the loan long term, you will recoup those extra closing costs over time and come out ahead. If you pay off this new loan within 5-7 years you will probably lose money by paying the discount points but that does not always mean it is the wrong option for you.

At certain times in life most of us hit financially tough times where current monthly cash flow becomes very important. Just like the old saying “a bird in the hand is worth 2 in the bush.” If you find yourself in this situation, paying the discount points and getting your monthly payment as low as possible might be the very best move for you. You know you will probably lose a little money in the long run, but if that extra monthly savings helps you pay off other high interest debt and avoid other costly problems that can come from living paycheck to paycheck.

So in conclusion, understanding discount points is very important as you are shopping for a VA loan. There is no right or wrong answer. Know your financial game plan and find a VA loan officer that can explore multiple loan options so you find the one that makes the most sense.