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Mortgage Points Explained (Finally ?)

While there is a LOT of mortgage jargon out there ?, “points” may be the most misunderstood.
  • Are points good?
  • Are points paid by the buyer?
  • How do points affect the interest rate?
  • Can I transfer leftover points to my AMEX account?
The answer is it depends…well except for that last question. That was just a goof – no these aren’t the same as credit card points!!
Mortgage points are fees that are paid to the mortgage lender for a lower interest rate…hence the phrase: “buying down the rate”. Which explains why mortgage points can sometimes be referred to as “discount points”.
Now here’s where it gets mathematical: Each point costs 1 percent of the mortgage amount. However, the actual rate reduction varies by loan and lender. Typically each point will lower the interest rate by one-quarter to one-half of a percent, but to make the decision on whether to pay for points, your lender needs to give you the exact amount that each point lowers the interest rate.


When does it make sense to buy points?

The longer you intend on owning the home, the more beneficial a rate reduction will be. So, if you aren’t planning on keeping the home for long, then buying down the rate doesn’t make much sense. Similarly, if you may refinance soon, it doesn’t make sense to pay for points.

In order to really nail down whether paying for points makes financial sense, it’s good to know your break-even point. The break-even is when the savings from the lower interest rate match the cost of the points. A mortgage professional (ahem!) can help lay out these scenarios so you can decide if paying for mortgage points is the right decision.


Who pays for points?

The buyer typically pays for points, but there are cases when the seller can issue a credit that can also be used to pay for mortgage points. This “rate buy-down” strategy is something that a real estate agent and/or mortgage professional can advise you on (AHEM!).


Are points tax-deductible?

Generally, mortgage points are tax deductible as they are considered prepaid interest. However, before you state your mortgage point deduction, pay attention to these requirements:
  1. The mortgage must be used to buy or build your primary residence
  2. The points must be a percentage of your mortgage amount
  3. The use of points must be a normal business practice in your area
  4. The amount of points paid must not be excessive for your area
  5. You must use cash accounting on your taxes
  6. The points must not be used for items that are typically stand-alone fees, such as property taxes
  7. You cannot have borrowed the funds to pay for the points from the mortgage lender or broker
  8. The amount you pay must be clearly itemized as points on your statement
We hope this helps…and as with all things in life, feel free to contact us with any questions!

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