Mortgage Tools
Points or No Points?
In the world of home mortgages, the term "points" has multiple meanings, unlike,
say, in basketball where a point is a point. First of all, mortgage points could
include loan origination fees, loan discounts or discount points. The type of point
you are describing is the kind that is paid in order to receive a lower interest
rate on your loan. In this case your point, which is 1% of the total loan amount,
is like prepaid interest.
In general, you can knock off about 1/4 to 1/8 of a percent off your interest
rate for each point you pay, says Keith Gumbinger, vice president of mortgage information
provider HSH Associates. And, because these points are interest payments, they are
tax-deductible in most cases. (Unless you are refinancing. In that case, points
may be deductible, but only for residents of North Dakota, South Dakota, Nebraska,
Minnesota, Iowa, Missouri and Arkansas.)
Generally speaking, it takes about five to seven years to recoup the cost of
paying a point upfront. Here's the math. Let's say you take out a $100,000 30-year
fixed mortgage, and you have the option of either paying 7% with no points or 6
3/4% with one point. With the 7% mortgage, your monthly payment will be $665. And
with the 6 3/4% loan, it would be $648, a savings of $16.17 per month. After 62
months, or just about five years, you would have recouped the $1,000 point you paid
upfront. And then you would start to benefit from the lower monthly payments.
But you also must consider how you might otherwise invest that $1,000. If you
can beat the taxable equivalent of your mortgage rate (about 10% in the above example
for those in the 28% tax bracket) then don't prepay your mortgage. Invest the money
instead.
Points or No Points? |
|
|