About Mortgage Points

If you are purchasing a home, you might be coming across questions regarding points. These are mortgage interest fees that are paid on the front end, to lower preliminary interest rates. They are often referred to as mortgage points; discount points or loan origination fees. Your lender will probably offer you the option to pay them at closing or not. Your lender will send you a good faith estimate. When you consider that estimate, you might notice that your down payment is higher if you pay points at closing. Before disregarding the option of paying points look into the situation a little deeper because it costs you more at closing.

In the most basic explanation possible, paying for them is a decision of paying now or paying later. One point is equal to one percent of your loan amount. So, if your loan is for $200,000, and you were to pay one point, it would cost you $2000. Lenders will often reduce your mortgage interest rate in exchange for paying points at closing. Ask your lender how much they will reduce your interest if you pay one point.

Deciding whether or not to pay for them can be difficult, but it mainly depends on how long you intend to stay in that home. The general rule is that if you are planning to stay in a home for five years or less, you should not pay for them. The reasoning behind this is that it will cost you more in points than it would in interest over that short time. The equation is points versus interest. You need to determine if paying for them up front will save you in interest over the long-term. The general rule here is that if you plan to be in your home for ten years or more, paying points is a money saving move.

The Internal Revenue Service regards points as pre-paid interest. Therefore, if you pay for them at closing, they are tax deductible. In fact, you can deduct them even if the seller pays your points. You will claim this deduction for the tax year in which you purchase your house. You can claim the total amount of points paid in that year’s return. If, however, you are refinancing a home, this deduction must be amortized over the term of the loan.

So, don’t just give up on the idea of paying points at closing. Instead, consider how their payment apply to your circumstance and whether paying them is, indeed, a drawback or, perhaps, a benefit.

When you apply for a mortgage, you are obviously looking out for lower rate of interest. One of the tricks to lower the rate of interest is to buy mortgage points. IRS allows the deduction on money spent to buy points of. However, buying points is not always recommended. What are the exact benefits of points and who should go for them? Abhyankar provides useful advice.

Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of personal finance. His famous Tax eBook “Stop donating your money to IRS” which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax.