Points are loan fees paid upfront to a lender that cover mortgage loan costs in exchange for a lowered interest rate. Lowered interest means those points can reduce your monthly housing costs and overall interest due over the length of a loan. Evaluating the cost of discount points is simple. One point equals 1 percent of the total loan amount. So on a $100,000 loan, for instance, 1 point would be $1,000. And 2 points on the same amount would be $2,000.
Borrowers looking to lower their monthly loan payment and increase their borrowing power can use points to their advantage. Moreover, when buying a house, those discount points are tax deductible for the year paid. However, when refinancing, points are deducted over the life of the mortgage and provide few tax benefits. In addition, a lower mortgage payment means a further reduction in tax benefits.
For most people, the decision on whether or not to pay points is based on how long they plan to stay in the house. So ask your lender how long it will take to recoup the cost of paying those discount points or do a simple break-even analysis. If your new loan results in a monthly savings of $50, for example, and the points cost $2,000, divide the cost of the points by your monthly saving to factor how long it will take to break even. In this example, payment includes the principal on an interest only loan, so it would take 40 months to recover the cost of paying those points.
So if you plan to sell or refinance your home in the next two years, paying discount points probably doesn't make financial sense. But if you plan to stay in the home for more than 10 years, you’ll probably save money by paying points
Whatever option is right for you, HomeLoan123.com is ready to help. Keeping you informed.
Doctor Mortgage
To ask HomeLoan123.com’s Doctor Mortgage a question, e-mail: info@homeloan123.com
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