Compare Listings

Will Points Make a Difference

  • March 11, 2019
  • Blog
  • 0

Lenders typically quote mortgages at a market rate but can offer a lower interest rate loan if the borrower is willing to pay points up-front which is considered pre-paid interest. These points are generally tax deductible for the year paid when the borrower pays them in connection with buying, building or improving their principal residence.

A point is one-percent of the mortgage amount. A lender will quote a lower-rate mortgage with a certain number of points. There is not a standard amount; it is an individual company policy.

A simple comparison of the two alternatives based on the borrower’s ability to pay the points and whether the borrower will stay in the home long enough to recapture the costs will help to determine which loan will provide the cheapest cost of housing.

In the example below, two choices are compared; a 4.25% loan with no points vs. a 4.00% loan with one point. If the buyer stays in the home at least 69 months, they will recover the $3,150 cost for the point on the lower interest rate.

If the purchaser stays ten years, he’ll save two thousand three hundred dollars over the cost of the point. A less obvious advantage will be realized because the unpaid balance on the lower interest rate loan will results in an additional $2,076 savings.

Points a Difference.png

Use this Will Points Make a Difference app to discover whether paying points will make a difference in your situation. This is an example of a permanent buy-down but temporary buy-downs are also available. A trusted mortgage advisor can help you determine alternatives.

For more information about the deductibility of points, see IRS Publication 936 and if you’re refinancing a home, there is a section specifically on that. For advice on your specific situation, contact your tax professional.

Related posts

  • Blog

Reasons Rental Homes Rank Highest

Single family homes offer the investor an opportunity to borrow large loan-to-value loans at fixed...

Continue reading
  • Blog

More Than Just an Address

For a short time after the housing crisis a decade ago, some homeowners thought the value of home...

Continue reading
  • Blog

Depends If You Can Afford It

Affordability, stability and flexibility are the three reasons homebuyers overwhelmingly choose a...

Continue reading

Join The Discussion