Q & A: What are Points?
A point is equal to one percent on the loan amount. For example for a $100,000 mortgage one discount point would be $1,000.
Points can be used in two different ways when purchasing a home. One way to use points is when making an offer on a home. In this situation you may need or want to ask the seller to pay a certain number of “points” to help cover a portion of your closing costs. For example if you have a mortgage of $100,000 you may ask the seller to pay 4 points (4%) toward your closing costs. This would reduce the amount of funds you will be required to bring to closing.
Discount points can also be used as fees to be paid to the lender at closing in order to lower your mortgage interest rate. The amount you pay and how much it will lower your interest rate changes every day as the market changes. Whether or not paying points makes sense for you depends in part on how long you plan to keep the loan. Your loan officer will help make that determination by calculating a few steps for you.
- Calculate the amount your monthly payment at the interest rate you will be charged if you do not pay points.
- Calculate the amount of your monthly payment at a lower rate if you pay points.
- Deduct the lower payment from the higher payment to find the amount you will save each month.
- Divide the amount charged for points at closing by the monthly saved amount. The result is the number of months you must keep the loan to break even on paying the points. Then you can determine if you plan on staying in the home that long. Would it be long enough to make it worth while to pay the points? Your loan officer will work through this with you to help you make the right decision.
Is it is good for you to know that discount points paid by you for a residential home are tax-deductible in the year that they are paid however it is always good to consult with your account before doing so as tax laws change every year.
For more information about points or any other question you have in regards to home financing, please contact me today!
“Your Personal Lender for Life.”
952-278-8717 or 612-867-9071
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