What are Points and Should You Pay Them?
Mortgage points, also known as points or discount points, are optional fees that you pay to the lender to lower the interest rate on your loan.
While you will pay more upfront with points, you will pay less over the life of the loan due to the discounted interest rate, making points a good option for those that plan to keep their loan for a long time.
The cost of a point is calculated based on the loan amount. For example, one point on a $100,000 loan would be one percent of the loan amount, or $1,000. Points do not need to be a round number. For example, you could pay 1.375 points, which would cost $1,375. Points are added to the closing costs paid when closing on the loan.
If you agree to pay points for a discounted interest rate, the points will be listed on the loan estimate that you receive at the beginning of the mortgage process, and in the closing disclosure that you receive before you close on your loan.
The amount of money you can save from points each month is completely dependent on your interest rate, the loan amount, and the length of your loan term. Generally speaking, one point will lower your interest rate by up to 0.25%. Keep in mind that the amount that your interest rate is reduced will vary from lender to lender as well.
Mortgage points are tax-deductible on up to $750,000 of mortgage debt when itemizing your deductions. According to the IRS, you generally can't deduct the full amount of points in the year paid. Because they are prepaid interest, you generally deduct them proportionately over the life (term) of the mortgage. If the loan is a home equity loan, line of credit, or credit card loan and the proceeds from the loan are not used to buy, build, or substantially improve the home, the points are not deductible.*
Your loan officer can help you determine whether or not points are worth purchasing. To do this, you’ll need to have a good idea of how long you plan on staying in your home so that you can determine if you will meet the break-even point. You’ll also want to consider how much cash you have on hand for closing and if you can afford to pay the points.
*TowneBank Mortgage is not a tax advisor. Please consult a tax professional for advice.
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