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3 Questions To Ask Before Paying Points On Your New Mortgage Loan

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Paying points is something you can do on many mortgages to get a lower interest rate for the duration of your loan. There are times when this is a good idea, but there are also times when it does not make sense to do this. If you are getting your first mortgage loan and do not understand how this works well enough to make a decision, you might be able to find out if paying points is right for you by asking the following three questions.

Do you have enough cash on hand to pay them?

When you purchase points on a loan, you are typically required to pay 1% of the loan amount per point. In return, you will generally receive a 1/4% reduction on your interest for each point you pay. The big question you need to ask yourself is whether you have enough cash on hand to pay for points. If you are planning on getting a $250,000 loan, you will need to pay around $2,500 per point. If you want to drop your interest rate by 0.5%, you will need to purchase 2 points, which would cost $5,000.

If you do not have enough cash to do this, you probably will have to rule this out as an option. If you do have enough cash, you should determine if buying points is really worthwhile.

How long are you planning on keeping this home?

The question you need to ask yourself when determining if points will be worthwhile is how long you plan on keeping your home. If you plan on living there for a few years and then selling it, buying points might not pay off. On the other hand, if you want to live in this home forever, it could make sense to purchase points.

The easiest way to find out if this is a good idea is by calculating how long it will take to break even if you purchased the points. You can do this by calculating the amount of money you will save on your mortgage payments. Once you determine this amount, divide the total cost for the points by this amount. This will tell you how many years it will take to break even. If you plan on living in the home for more years than the answer to this, it could make sense for you to purchase them.

Do you need an extra tax write-off this year?

The final question to examine is whether or not you could benefit from an extra write-off for the year. When you purchase points, you will be allowed to write off the amount you paid for the points. This is a one-time write-off, and it could help you decrease your tax liability. For example, if you received a large settlement check that will be taxed on your return, claiming this extra write-off could help you reduce the amount of taxes you will owe.

If you have any questions about points or mortgage loans, contact a lender like Doolin Security Savings Bank.