Since the vast majority of those who purchase a home, or any other form of real estate, use some type of mortgage vehicle, it may be useful and/or beneficial to better understand and appreciate, as much as possible, regarding the many variables and / or factors, involved and related! We often discuss factors, such as loan term/length, interest rates, variable versus fixed rate, etc. It seems that few people fully understand what the points mean, when it comes to this process and transaction. When someone pays points, when purchasing a mortgage, they must realize that one point is equal to one percent of the amount borrowed. For example, paying 1% on a $500,000 mortgage means paying $5,000 up front. Sometimes this is necessary due to sub-optimal credit, and other times it can be used to pay the rate that could be paid monthly. This article will briefly discuss and examine, 3 considerations, whether paying points is a good strategy and/or makes sense for the borrower.
one. You need cancellation of additional interest, this year: Many people have variable income, from year to year! It might make sense, since the mortgage interest is still tax deductible, for these people, paying the points, to have a greater amortization, in the year, when they are in a higher tax bracket. However, one should discuss this thoroughly with their trusted tax professional before using this strategy/approach.
two. You have current funds, but need a lower monthly maintenance cost: Imagine, if one had sufficient funds to pay the additional amounts needed for a down payment, but did not qualify for a loan with the highest monthly payment and/or needed a lower monthly payment to qualify! In these circumstances, paying points could make sense and be an effective strategy and/or approach.
3. Payment Mortgage Interest Rate: When you pay in advance a part of the total interest, necessary to obtain a mortgage, by paying points, you will receive a lower interest rate from the lender. Again, one should thoroughly discuss with their financial and tax professionals whether this approach makes sense to them.
Do you have to pay points when you apply for a home loan? There is no one size fits all answer and/or response, and the answer is, It depends!