What’s Up with Mortgage Points?

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If William Shakespeare financed a home today he’d probably ask the question regarding mortgage points: “To pay or not to pay? That is the question.” Homebuyers direct the same question to their real estate agents. Here are some perspectives:

In its simplest definition, a point is an additional loan fee that is paid to the lender in exchange for a lower interest rate. It’s called “buying down,” and it allows you to reduce your rate for the life of the loan.

Let’s say you secured a mortgage loan for $150,000 without points, at 4.6% on a 30-year mortgage, your principal and interst payment would be $768.97 a month. If you paid two points ($3,000), the interest rate in this example may go down to 4.1% and the monthly payment would decrease to $724.80, a savings of $44.17 a month.

In this scenario, it would take you about eight years to recoup the money you paid up front, so if you are planning on staying in your home a while, this will save you money in the long-run.

Home buyers must answer some key questions to determine if paying points is a wise decision. Specifically:

• How long will you keep the home?
• Do you have extra money to pay points?
• Could that money be better used for something else?

Money managers may suggest that a smarter option is to invest that $3,000 because you could do much better than your $44 savings, but you have to weigh the variables.

“Paying points depends on your career, your interests and all the things that predict your future,” said financial advisor Thomas Watkins of Total Mortgage Services inMilford,Conn.“Points are paid up front while your savings will be spread out into the future. Therefore, you get more benefit if you own your home longer, or if you don’t refinance for a long time.”

The rule of thumb when it comes to points is simple: If you plan to stay in the house for less than three years, do not pay points. If you plan to stay in the house for more than five years, pay 1 to 2 points. If you’ll be in the house for three to five years, paying points doesn’t make a significant difference.

Another important aspect to consider: Since points are interest-payment related, they are fully deductible on your taxes in the year that you close. See your tax advisor for details.

Mortgage points can add up to valuable savings over the course of your loan, but the future isn’t always predictable. Even if you “plan” on staying in your home for 20 years, changes in your career or family life could alter the plan.

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