Why pay points?

As a matter of fact, you dont – but the option to pay them has value to many borrowers, if they understand how to exercise it to their benefit.

(PRWEB) June 4, 2004 -- Discount points (http://www.mortgagefit.com/discount-point.html) are additional fees paid up-front to a lender at closing (http://www.mortgagefit.com/closing.html) in order to lower or buy down your mortgage interest rate. The fee usually covers the administrative cost of making the loan. The cost of each point is equal to one percent of the loan amount. For example, for a $100,000 loan one discount point equals $1,000. Generally, lenders will offer the same loan without points for a slightly higher interest rate. The more points that you are willing to pay, the lower the interest rate the lender will offer you.

The Discount Point(s) that you pay may be tax deductible. The Discount Points are usually deducted under Schedule "A" of your IRS 1040 tax return.

Each discount point paid lowers the fixed interest rate by 0.250 percent and adjustable rate by .375%. These points lower the interest rate for the entire term of the loan.

Points paid for residential real estate are tax deductible in the year they are paid. Buyers may deduct the amount paid even if the seller pays for the points at closing.

An origination fee ( http://www.mortgagefit.com/origination-fees.html) is a fee charged to cover the costs of processing your loan. It typically costs the same as one point, but it is a separate fee.

Whether or not paying points makes sense for you depends in part on how long you plan to keep the loan.

1. Calculate the amount of your monthly payment at the interest rate you will be charged if you do not pay points.
2. Calculate the amount of your monthly payment at the lower rate if you do pay points.
3. Deduct the lower payment from the higher payment to find the amount saved each month.
4. Divide the amount charged for points at closing by the monthly amount saved.

If the borrowers are cash-short, they are obliged to avoid points so that they will have enough cash to complete the deal. If they are income-short, they must accept the lowest rate available so that the mortgage payment won't be viewed as excessive relative to their income.

If the borrower expects to have the mortgage a long time, paying points to reduce the rate makes economic sense because you are going to enjoy the lower rate for a long time. If your time horizon is short, avoid points and pay the higher rate because you wont be paying it for long.

If you have further questions about discount points please feel free to fill out the contact form (http://www.mortgagefit.com/contactus/) on this website (http://www.mortgagefit.com/) to contact us with your question.

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