Since the vast majority of those, who purchase a home, or any other form of real estate, use some sort of mortgage vehicle, it might 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 the term/ length of the loan, interest rates, variable versus fixed type, etc, it seems, few people fully understanding what, points, mean, when it comes to this process and transaction. When someone pays points, in acquiring a mortgage, he must realize, one point is equal to one percent, of the amount borrowed. For example, paying 1% for a $500,000 mortgage, means pre – paying $5,000. Sometimes, this is necessary, because of a less – than – optimal credit standing, and at others, may be used, to pay – down the rate, one might pay, on a monthly basis. This article will briefly discuss and examine, 3 considerations, for whether paying points, is a good strategy, and/ or makes sense, for the borrower.
1. Need extra interest write – off, this year: Many individuals have varying income, from year – to – year! It might make sense, since mortgage interest is still, tax – deductible, for these people, to pay the points, in order to have a greater write – off, in the year, when they are in a higher tax bracket! However, one should discuss this, thoroughly, with his trusted, tax professional, prior to using this strategy/ approach!
2. Have present funds, but needs a lower monthly carrying cost: Imagine, if one has ample funds, to pay the extra amounts, needed for the down – payment, but either doesn’t qualify, for a loan, with the higher monthly payment, and/ or needs to have a lower monthly installment, to be qualified! In these circumstances, paying points might make sense, and be an effective strategy, and/ or approach!
3. Pay – down mortgage interest rate: When one pre – pays a portion of the overall interest, necessary to obtain a mortgage, by paying points, he will receive a lower interest rate, from the lending institution. Again, one should thoroughly discuss, with his financial and tax professionals, whether this approach, makes sense for him!
Should you pay points, when you seek a mortgage loan? There is no one – size – fits – all answer and/ or response, and, the answer, is, It depends!