Seller credits can be used to pay points on an interest rate for a VA home loan, ultimately reducing an interest rate and consequently, the monthly mortgage payment. Here’s how it can work:
Understanding Seller Credits
Seller credits refer to a negotiation between the buyer and the seller, where the seller agrees to contribute a certain amount towards the buyer’s closing costs. Alternatively, this negotiated amount can also be used to pay points.
Understanding Points
In the context of a mortgage, points are fees paid upfront to the lender at closing in exchange for a lower interest rate. Each point typically represents 1% of the loan amount. The rules of seller credits to pay points may change by loan program and the lender, so it is essential to check with your loan specialist regarding any limitations.
Impact on Interest Rate
When points are paid upfront, the interest rate on the loan is typically reduced. By using seller credits to cover these points, the buyer effectively lowers their interest rate without having to pay the associated upfront costs themselves.
Paying Points Scenario with Seller Credits
Let’s consider an example where you have a loan amount of $500,000 and a starting interest rate of 6.75%. The buyer has a seller credit of $10,000. We’ll explore the impact of using the seller credit to pay points on the interest rate.
Assuming each point is equivalent to 1% of the loan amount, paying points can help reduce the interest rate. So let’s look at two scenarios:
- Option 1: No Points
- Loan Amount: $500,000
- Interest Rate: 6.75%
- Monthly Payment: $3,243
- Option 2: Paying Points
- Loan Amount: $500,000
- Points Paid: 2 points ($10,000)
- Interest Rate: Reduced to 6% Monthly
- Payment: $2,998
In this example, by paying 2 points ($10,000), the interest rate is reduced from 6.75% to 6%. Consequently, the monthly payment decreases from $3,243 to $2,998, resulting in savings of approximately $245 per month.
Remember, consult with a mortgage professional to evaluate whether paying points aligns with your specific circumstances. Finally, it’s always important to discuss the details of points payment with your lender, as they may have specific policies, restrictions, or alternative options available to you. Call us at 808-792-4251.