Oct 13
Are Loan Points a Good Idea?
When offering a home loan, many financial institutions will offer points to lower the interest rate of the loan. This can be helpful to reduce the monthly mortgage payments, but is not always a good idea. The decision to pay points should be made after careful consideration of the home buyer’s specific circumstances. Each loan is different, and it is important to realize what is best for you.
How does paying points up front work? Basically, the buyer would agree to pay a certain amount at the time of closing and the lender agrees to lower the interest rate. Perhaps with no points, the loan is offered at 9%. The bank may then offer a 7% loan based on a payment of a specific number of points. It may be a small amount overall, but remember to consider how long you will need to be in your home to make up for that extra money spent up front. For example, the paying points means $3,000 more at closing, it may take several years to recoup financially that amount. Paying points on a loan is a better idea for homeowner’s that plan to stay in a house for many years. That almost guarantees that the difference will be made up in time. If the buyer is planning to live in the home for only a few years, the money up front may actually cause a loss to the buyer. On an original loan, these points are tax deductible in the same year as the closing. Check with your tax professional to help determine if it’s right for you.
