May 25th, 2019 9:35 AM by Jackie A. Graves
closer you get to closing on your home, the more you will find that a variety
of i’s will need dotting and t’s will need crossing before you are finally
handed the keys. And, one potentially fantastic incentive to consider taking
advantage of during the process comes in the form of deciding to buy mortgage
points. If you don’t know what they are, don’t dismay, just read on.
lender typically offers them to you alongside your mortgage quote. If you take
advantage of the mortgage points offer, you are paying interest on your loan
upfront in order to reduce the rate over its lifetime. When you receive your mortgage quote, your lender will
include your loan rate and detail your mortgage points.
you are doing this initial assessment, it is also key to look honestly at your
access to cash and ask yourself: “is there enough to pay for the points, my down payment,
closing costs, and reserves?” If the answer is yes, the benefits of buying
mortgage points might be just what you need.
points are prepaid interest on your mortgage loan. As the homebuyer, you are
offered the opportunity to purchase anywhere from zero to four points depending
on how much you want to lower your rate. So, for example, for a $300,000 loan,
one mortgage point is worth $3,000. After calculating, one mortgage point at a
4% interest rate for a 30-year mortgage brought the savings to over $10,000 for
a 10-year period, while four mortgage points saved less than $2,500.
of the reason for deciding to buy mortgage points is to pay upfront in order to
lower your interest rate over time. Another advantage to this incentive is that
it can be tax deductible,
so make sure to ask your lender about it.
points are charged by the lender and cover the cost of making your loan.
Origination points can be tax deductible, but with a few caveats: they are
deductible when you use them to obtain your mortgage, but not to pay other
associated closing costs.
The IRS details what can and cannot be deducted, including notary and
addition to the length of time you plan on staying in the home, another number
to crunch before deciding on whether or not you will buy mortgage points is the
“break even period.” This is the length of time it will take for you to recoup
the money you paid out for the points.
calculate this, divide the cost of the points by the savings on your monthly payment.
The resulting number is the length of time it will take for your monthly
payment savings to equal what you paid for the points. In the case of the
$300,000 home, savings with one mortgage point are about $73 per month,
dividing that by $3,000, we get a total of 41 months, or roughly 3.4 years to
is also important to note that the rate is not set and relies on your lender
and the marketplace. Similarly, if you are buying mortgage points for an
adjustable rate mortgage (ARM), the deduction is different and often only
provides you a discount for a shorter, set amount of time, such as the initial
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