Closing costs are part of any refinance. VA’s Interest Rate Reduction Refinance Loan (IRRRL) can be a “no closing costs” refinance that is, certain fees and charges can be rolled into the loan. These allowable fees and charges include discount points.
The general question is how many discount points should one pay for a mortgage? And the bigger question, one that concerns the IRRRL, is how many of such points may be financed into the refi loan?
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What are discount points?
Before we discuss the VA’s guidance on discount points, let’s brush up on the nature of these points and how they work.
They are basically prepaid interest; these are paid to lower one’s mortgage rate. Because you pay to lower your rate by a quarter percentage point or so, you are basically buying down your interest rate vis-a-vis the rate you’ll get with zero points.
The value of each discount point or its equivalent rate decrease depends on the loan, its terms, and the lender.
While discount points can lower your rate, they can increase your closing costs. And like any other closing costs, they can be financed or settled upfront.
If you were to pay them upfront, do you have cash? If you finance, how long do you need to stay in the home to reach breakeven and recoup this expense?
How many discount points for an IRRRL?
VA allows lenders to charge reasonable discount points on IRRRLs. But there’s a caveat: only up to two of such points can be financed into the new loan. The rest must be paid in cash by the borrower.
So when you take out an IRRRL, the maximum loan amount you can borrow or finance would be made up of:
- Existing VA loan balance
- VA funding fee
- Allowable fees and charges
- Up to two discount points
Thinking of refinancing your existing VA loan? Get in touch with a lender today.
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