Agent: How Long you Keep Your Mortgage Will Help Determine Whether you Should Pursue Points

You get points for using a credit card, points for drinking a lot of coffee and even points for flying. Some people base their buying choices on the points they receive. But, are all points equal or are they beneficial in all instances? Take mortgages. Should you consider paying points when applying for a mortgage?  Did you just assume you had to pay points?

First of all, what are points? One point on a mortgage typically equates to 1 percent of the loan amount. Instead of just requiring a specific interest rate, lenders appeal to buyers with a lower rate but charge upfront interest to secure that rate. On a $500,000 loan, 1 point or 1 percent would equate to $5,000. By paying the “point” a buyer can typically lower their rate by ¼ percent. A buyer can also choose to pay additional points if it is important to lower the interest rate even further.

Good deal? Consider this. At today’s rate of 4.5 percent on a 30-year conventional loan of $500,000 with 1 point, the payment would be $2,533.  Without the point, the rate would rise to 4.75 percent with a monthly payment of $2,608. That is a difference of $75. At that rate, it would take 66 months or over five years to cover the cost of the point. If you don’t plan on staying in the home for longer than five years or if a refinance is in the future, paying the added interest upfront may not make sense. If you choose not to pay any points and do stay in the home for the 30 years, you would be paying an additional $27,000.

With some lenders advertising a “no point” option, now is the time to understand just what that means to the consumer. It sounds like a good deal. It sounds like a great way to save some money and still get a lower rate. If the lender is just rolling the extra interest into a monthly payment, the previous calculation needs to be considered. Mortgage calculators are available to help you determine the monthly payments on any mortgage with or without points. It is up to the consumer to do their homework and understand the complexity of the mortgage process. 

Tax time always brings up questions on what is deductible. Points paid on a home purchase are deductible in the year they were paid. Points paid on a refinance are generally deducted during the life of the loan. These can be determined by dividing the points paid by the number of monthly payments made over the life of the loan. For example, if you paid $5,000 in points and will make 360 payments on a 30-year loan, your allowable deduction would be $13.88 a month or $166.56 a year.

A seller is sometimes asked to pay points for the buyer to induce the lender into arranging financing for the buyer. The seller cannot count the points as interest paid, but can subtract the amount of the points from the total amount gained on the home. There are additional guidelines for sellers and buyers. It is wise to consult a tax accountant to determine the specific amount of the deductions.

Joan Probala is the managing broker for Issaquah Windermere (Windermere Real Estate/East Inc.). She has 30 years of experience in real estate, construction and sales.