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 helpful 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/duration, interest rates, variable vs. fixed rate, etc. It seems that few people fully understand what dots mean, when it comes to this process and transaction. When someone pays points when acquiring a mortgage, they should 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 a less than optimal credit situation, and other times it can be used to pay the rate one might pay monthly. This article will briefly discuss and examine 3 considerations as to whether paying points is a good strategy and/or makes sense for the borrower.
1. You need additional interest cancellation, this year: Many people have variable income, from one year to the next! It might make sense, since the interest on the mortgage is still tax deductible, for these people to pay the points, to have a higher 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.
2. You have current funds, but need a lower monthly maintenance cost: Imagine if you have enough funds to pay the additional amounts needed for a down payment, but you don’t qualify for a loan, with the highest monthly payment, and/or need to have 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 prepay a portion of the total interest needed to obtain a mortgage by paying points, you will receive a lower interest rate from the lender. Again, one should thoroughly discuss, with his financial and tax professionals, whether this approach makes sense for him.
Do you have to pay points when you apply for a home loan? There is no one size fits all answer and/or answer, and the answer is, It depends!
