Someone has suggested that when you purchase your new home, it may be beneficial for you to pay points. Okay – what are points and how does it help a home buyer?
Points on a mortgage are prepaid interest. One “point” is equal to an amount of one percent of your mortgage amount. If you are taking a $300,000 mortgage, one point equals $3000. When you prepay interest, the mortgage lender will reduce your interest rate Typically a prepayment of one point will equal a rate reduction of 0.25%, tow points in 0.50%.
At today’s interest rates of ( let’s say) 4%, it will take approximately 5 1/2 years for the monthly savings to equal the amount you have paid in prepaid interest. But – once that 5 1/2 years has passed, that savings will go into your pocket. Over 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.
And in many cases, the prepaid interest is tax deductible in the year that the prepaid interest has been paid.
And here’s an interesting twist – speak with your Realtor about using seller concessions to purchase the points. If your Realtor doesn’t know what you’re talking about, I suggest that maybe you need a better Realtor, possibly me.
So – is there any reason why you should not buy down your interest rate with points?
While points can be your friend, not always are they beneficial to you. If you think a refinance is possibly in the near future, they probably are not. Remember – it takes 5 1/2 years to save enough to cover your investment. And if you think you may be moving in less than those 5 1/2 years, the same applies.
So I recommend that you speak with your Realtor about seller concessions. Speak with your mortgage professional to run the numbers. And think about speaking with your accountant. What they say can help you make an informed decision.