When it comes to comparing interest rates for a mortgage loan, homebuyers often have the option of choosing a loan with a lower interest rate by paying points. Simply put, a point is equal to 1 percent of the loan amount. For example, with a $100,000 loan, one point equals $1,000. Points are usually paid out-of-pocket by the buyer at closing.
Paying points may seem attractive, because a lower interest rate means smaller monthly payments. But is paying points always a good idea? The answer generally depends on how long you plan to stay in the house. Let’s look at an example:
Bob and Betty Smith are shopping for loan rates on $250,000 home (financed on the full amount-not considering their downpayment). They are considering paying points on their mortgage loan. Their bank has offered them a 30 year loan at 5.5 percent with no points. This works out to a monthly payment of $1,419.47.
However, their bank has also offered them a loan at 5 percent if they agree to pay 2 points (or $5000). At this lower rate, their monthly payment drops to $1342.05, or a savings of $77.42 per month. For more information on points, ask one of njretoday Top Mortgage Lenders.
By dividing the amount they paid for the points ($5,000) by the monthly savings ($77.42), we see that they will have to own the house for 64 months (or just over 5 years) before they will start to see savings as a result of paying points. If Bob and Betty plan to stay in the house for many years, then paying points could make good sense. But if they see themselves moving to another house in the near future, they’d be better off paying the higher interest and no points. (Note: for simplicity, the above example does not take into account the time value of money, which would slightly lengthen the break-even time.) To figure out your monthly payments on the purchase of your next home, njretoday provides a mortgage calculator free.
Can you deduct points on your income taxes?
In the United States, one side benefit of paying points on a mortgage loan is that they are fully tax deductible for the same tax year as your closing. However, this does not apply to points paid for a refinance loan. For refinances, the IRS requires you to spread out the deduction over the life of the loan. For example, if you paid $5,000 in points for a 30-year refinance loan, you can only deduct 1/30 of the $5,000 each year for 30 years. If you pay off the loan early, though, you can deduct the remaining amount that tax year. As to this page and all pages regarding tax situations, please check with your tax professional.
Post By Audeliz Angie Perez (160 Posts)
Angie Perez is a NJ Circle of Excellence award winning real estate agent for Weichert, Realtors in Edison. She sells anywhere from 12-25 houses per year on a consistent basis since 2005. Ms. Perez is primarily a buyer's agent on 60% of her real estate sales where she represents rental income investors, first time home buyers & trade up home buyers of 1-4 family homes within specific towns encompassing 4 NJ counties: Union, Essex, Middlesex and Somerset County. Many of Ms. Perez's clients appreciate her ability to negotiate favorable real estate deals for them. Many of her clients commented that her research abilities, her honesty, her knowledge of local market trends and her proficiency to manage multiple real estate transactions from start to close are some of the reasons why she was hired as their agent of choice. Please call, text or email Angie Perez to ask if she lists or sell in your town. If she can not help you, Ms. Perez would be more than happy to help or refer you to someone who can.
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