Understanding Points In Home Mortgages

Understanding Points in​ Home Mortgages
If you​ are in​ the​ market for a​ mortgage to​ buy a​ house you've no doubt heard the​ term points being thrown about .​
No,​ they aren't talking about the​ score from last night's NFL game; they are actually talking about a​ fee that is​ paid to​ the​ lender of​ the​ mortgage you​ are taking out to​ buy your home .​
Points can have impact on​ your mortgage,​ both positive and negative,​ so being informed about how they can help and hurt you​ is​ crucial when determining if​ a​ mortgage loan is​ the​ right fit for you.
In the​ simplest form,​ points are a​ onetime fee that is​ paid to​ a​ lender and are used to​ secure a​ loan below the​ current market interest rate .​
Each point represents 1% of​ the​ mortgage amount .​
So if​ you​ have a​ mortgage for $150,​000 then one point would be equal to​ $1,​500 .​
a​ seller would pay points on​ a​ loan to​ reduce the​ interest rate of​ the​ loan which could potentially save them much more than the​ points cost up front over the​ life of​ the​ loan.
Points are not always paid for by the​ buyer; they can sometimes be paid by the​ seller as​ well .​
a​ seller would typically pay for points when they are in​ a​ rush to​ sell the​ property or​ have been having a​ hard time finding buyers for the​ property .​
in​ this case it​ is​ used as​ an​ incentive to​ get the​ buyer to​ move on​ the​ property.
There are times when it​ may not be in​ your best interest to​ purchase points .​
a​ rather simple way of​ doing this is​ to​ determine the​ payback period,​ or​ length of​ time it​ takes you​ to​ pay back the​ points you​ purchased up front .​
First,​ determine your monthly payment amount without points,​ and then with points .​
If you​ are paying $900 without points and $800 with points,​ your monthly savings is​ $100 .​
Now take the​ total cost of​ the​ points,​ say 2 points on​ a​ $150,​000 mortgage which would be $3,​000,​ and divide the​ cost by the​ monthly savings .​
$3000/100 = 30 months .​
It will take you​ 30 months to​ realize your savings of​ $100 per month .​
For a​ 30 year loan,​ it​ would make a​ lot of​ financial sense to​ purchase the​ 2 points up front if​ you​ can afford them .​

Where you​ have to​ be careful with points is​ when you​ don't plan to​ be in​ your current home long enough to​ reach the​ payoff .​
you​ also have to​ keep in​ mind that the​ cost for points is​ above and beyond your down payment on​ the​ house you​ want to​ purchase as​ well .​
It can add significant up-front costs,​ which is​ why it​ is​ a​ wise move only if​ you​ plan on​ occupying the​ house for a​ long period of​ time and have significant cash up front to​ be able to​ afford it.
One final note about points - they are tax deductible as​ they are considered prepaid interest .​
They are deductible by the​ buyer,​ even if​ the​ seller pays for them .​
Points are deductible fully in​ the​ year they are paid for a​ new purchase,​ and over the​ life of​ a​ loan for a​ refinance.

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