|
Should You Pay Points Or Not?
The decision
to pay “points” on a mortgage is something you as a borrower may need to
make when applying for a loan. Besides the practical consideration of
whether or not you can afford to pay points at closing, you also need
to factor in how long you plan on having the loan, if you can invest the
savings elsewhere, and any gains from potential tax breaks.
First, let’s
define paying points. To put it simply, paying points mean you pay money
up front to get a lower interest rate on your loan. Each point you pay
is equal to one percent of the mortgage and you either pay at settlement
or roll the points into the loan. By paying points, your interest rate
is then lowered one-eighth to one-quarter of a percent for every point
you pay. Generally, borrowers choose to pay points on fixed-rate loans,
but not in all cases. Also, be aware that paying points isn’t always an
option in every situation. Whether or not you can pay points will depend
on your lender as well as the type of loan you’re getting.
The most
important question to ask yourself when you’re considering paying points
is how long you’re going to have the loan. If you plan on having the
loan for awhile (say, ten years or more), the savings on the monthly
payments and interest will more than likely cover the cost of paying
points up front. For example, if you’re getting a $500,000 fixed-rate
loan for thirty years and you can get a rate of 6 percent by paying one
point (as opposed to a 6.25 percent rate with no points), you would need
to keep that loan for approximately 57 months to break even on points.
Another
consideration is putting your savings in other ventures such as the
stock market or even a basic savings account. Ask yourself this: If you
decide not to pay points, will you invest your savings elsewhere? And if
you do, will you get a better return on your investment? Although the
current stock market is quite volatile, you still may be better off if
you don’t pay points on your loan and instead invest that money in a
stock that will give a more stable—and more beneficial—return.
Finally,
you’ll need to take a close look at your current tax situation.
In most cases, either in the year you close (for a new loan) or
during each year for the full life of the loan (for a refinance) you’ll
be able to deduct the points you pay from your taxes. Also, even if the
seller pays your points for you (which is becoming increasingly common
with the current buyer’s market) you’ll still be able to deduct those
points from your taxes going forward. Although the amount you’ll be able
to deduct will vary based on a number of different factors, it is a
financial consideration that you should think about. ∆ |
