Top 7 Reasons To Pay Points On Your Mortgage
By Ed Craine
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Whether you’ve refinanced your home multiple times, or you’re applying for a mortgage loan for the first time, you’ll undoubtedly be given the option to pay points on your loan. And you’ll probably also have the option to decline paying points. There are merits to both options. In this article, we’ll look at the Top 7 Reasons to opt for a loan with points. In a subsequent article, we’ll look at reasons not to pay points.
- Paying Points Equates To Lower Monthly Payments
When you select a mortgage loan option with points, you agree to pay a percentage of your total principal loan amount. In this case, one point equals 1% of the loan. Two points would equal 2% and so on. For a $300,000 loan one point would cost $3,000, and two points would equate to $6,000. But, when you consider that paying points upfront on a loan will “buy down” your interest rate, you’ll be rewarded with a lower monthly mortgage payment.
- You’ll Save Money Over Lifetime Of Loan.
Because you’ll have lower monthly payments if you pay points on your mortgage, over the life of your loan, you’ll save money. Consider that historically most people keep their loans for 5-7 years. (The past five years or so, this hasn’t always been the case, but those short term exotic loans have by now become virtually extinct.) All the same, you’ll typically break even on paying the points within 2-4 years, allowing you to save a great deal of money each year after that.
- You’ll Have The Option To Pay Off Your Loan Faster.
If you decide to pay points on your mortgage, you get the added benefit of possibly paying off your loan faster, than if you wouldn’t have paid points. To do this, you’ll just need to pay the amount that you would have paid if you’d opted not to pay points. (Your broker can provide you with this figure.) Simply paying more than is required, i.e., paying more towards your principal each month can shave years off the life of the loan.
- You’ll Be Able To Borrow More.
When you opt to pay points on your loan, your interest rate will be reduced. Since you’ll then qualify for a loan at a lower interest rate, and therefore, lower monthly payment, the amount of money the bank will be willing to lend you will increase. This is particularly helpful if you’re a buyer, as you’ll have much greater purchasing power.
- You’ll Probably Qualify For Larger Tax Deductions When You Purchase a Home.
When you pay points, you’re essentially paying interest up front which in most cases will equate to bigger tax deductions for the year. There are some instances where this won’t be the case, so you should confirm with your accountant. Generally speaking though, a purchase money mortgage with points paid will yield better tax breaks, than a mortgage with no points paid.
- Many Times You’ll Pay Nothing Out of Pocket, To “Pay” Points.
When you add points to your refinance, the points are financed into the loan, so you don’t actually pay cash upfront for them. Or, if you’re buying a home, you can request that the seller pay your points, and many times they’ll agree, so again you pay nothing out of your pocket, but you still get the lower interest rate.
- You’ll Build Equity Faster
When you pay points, and get a lower rate, you will pay down your loan faster in the early years of the loan. That means that you begin building equity in your home that much faster. More equity will naturally benefit you when you decide to sell your home. Likewise, equity will be of tremendous benefit when if you decide to refinance.
Ed Craine is CEO of San Francisco based Smith Craine Finance, an award winning mortgage brokerage. He was appointed Vice President of CAMB in 2007. Ed serves as an Executive Director for BNI, and is a contributing author to several NY Times Best Selling Books. Visit http://www.smithcraine.com
Article Submitted On: June 08, 2009