February 21st, 2018 7:01 AM by Jackie A. Graves
points are a type of prepaid
interest or fees mortgage borrowers can purchase that lowers
the amount of interest they have to pay on subsequent payments. Each discount
point generally costs 1% of the total loan amount and depending on the
borrower, each point lowers the loan's interest rate by one-eighth to one
one-quarter of a percent. Discount points are tax deductible only for the year
in which they were paid.
points are also known as mortgage points. They are a one-time, upfront mortgage
closing cost which five a mortgage borrower access to discounted mortgage rates
as compared to the market. Because the IRS considers discount points to be
prepaid mortgage interest, they are tax deductible only for the year in
which they were paid.
example, on a $200,000 loan, each point would cost $2,000. Assuming the
interest rate on the mortgage is 5% and each point lowers the interest rate by
0.25%, buying two points costs $4,000 and results in an interest rate of 4.50%.
down a mortgage interest rate with discount points does not always require
paying out of pocket. Particularly in a refinance situation,
the lender can roll discount points, as well as other closing costs, into the
loan balance. This prevents the borrower from having to come to the closing
table with money but also reduces his equity position in his home.
A borrower who pays discount points when purchasing a home is more
likely to have to come out of pocket to meet these costs. However, many
scenarios exist, particularly in buyer's markets, in which a seller offers to
pay up to a certain dollar amount of the buyer's closing costs. If other
closing costs, such as the loan origination fee and title insurance charge, do
not meet this threshold, often the buyer can add discount points and
effectively lower his interest rate for free.
lenders and borrowers gain benefits from discount points. Borrowers get lowered
interest payments down the road, but the benefit applies only if the borrower
plans to hold onto the mortgage long enough to save money from the decreased
example, a borrower who pays $4,000 in discount points to save $80 per month in
interest charges needs to keep the loan for 50 months, or four years and two
months, to break even. If the borrower thinks he might sell the property or
refinance his loan before 50 months have passed, he should consider reducing
what he pays in discount points and taking a slightly higher interest rate.
benefit from discount points by receiving cash upfront instead of waiting for
money in the form of interest payments over time, which enhances the lender's liquidity situation.
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