Someone suggested that I pay mortgage points when I finance my new home.
Someone made a suggestion that when you purchase your new home, it may be to your benefit to pay points. Okay – but what are points? And how do points help a home buyer?
Think of mortgage points as prepaid interest. One “point” equals one percent of your mortgage amount. If you’ll be borrowing $300,000 mortgage, one point equals $3000. By prepaying interest, the mortgage lender will reduce your interest rate Typically, by prepaying one point, you’ll equal a rate reduction of 0.25%. And, two points would be 0.50%.
Today’s interest rates are hovering around 4%. In approximately 5 1/2 years, your monthly savings will equal the amount you have invested in prepaid interest. However – once that 5 1/2 years has passed, that savings will go into your pocket. If you remain in the house for the full life of a 30 year mortgage, your investment in prepaid points will provide a return of in excess of 5 times your investment. Even with my limited math skills, that seems like a great investment.
And quite often, the prepaid interest is tax deductible in the year that the prepaid interest was paid.
Let Someone Else Pay Points
This could be an interesting twist. Speak with your Realtor about using seller concessions to purchase the points. Huh? Let me explain.
On that same $300,000 mortgage, 2 points should cost about $6,000. Ask the seller to pay those points at closing from their proceeds. This will probably raise the cost of the home. However, the savings may work out to your benefit. Especially if you don’t plan in being in the home more than 1- -12 years. Because, if you pay an additional $6,000 for the home, you won’t actually pay an additional $6,000. You’ll make mortgage payments on that $6000. In fact, you’ll need to make payments for 17+ years before it actually costs you $6,000.
This is probably getting confusing. Ask your Realtor to explain in detail. However, if your Realtor doesn’t know what you’re talking about, maybe you need a better Realtor. Call me.
So – is there any reason why you shouldn’t pay points to buy down your interest rate?
Reasons Not to Pay Points
While points can be your friend, they’re not always beneficial to you. If you think you may refinance in the near future, they probably aren’t. And that’s because it takes 5 1/2 years to save enough to cover your investment. And the same applies if you think you may be moving in less than 5 1/2 years,.
Here are my recommendations. Speak with your Realtor about seller concessions.Ask your mortgage lender to run the numbers.Also, speak with your accountant. They’re the professionals, and what they say can help you make an informed decision.
Are you ready to either buy or sell a home? Please call me.
Are you looking for a Monmouth County home that’s not in an active adult community?