it comes to comparing interest rates for a mortgage
loan, home buyers 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.
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:
and Betty Smith are shopping for loan rates on a $150,000
home. Their bank has offered them a 30 year loan at
7.5 percent with no points. This works out to a monthly
payment of $1,049.
their bank has also offered them a loan at 7 percent
if they agree to pay 2 points (or $3,000). At this
lower rate, their monthly payment drops to $998, or
a savings of $51 per month.
dividing the amount they paid for the points ($3,000)
by the monthly savings ($51), we see that they will
have to own the house for 59 months (or just under
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.)
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
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