Points
When You Purchase a Home
When it comes to points and buying a home, this is an opportunity you should
not pass up. At the very least, you should be asking about your options so that
you know you have made an intelligent decision.
Points will buy you a better rate and 1 point is equal to 1% of your mortgage
amount.
Read more about definitions and examples on the
main points
page
When you pay points on the purchase of a home, any points you pay are deductible
in the year of the purchase. You will get the benefit of lower mortgage payments
for all the years you own the home but receive the tax break immediately.
This makes points on the purchase of a home much more valuable than on a refinance,
where you have to spread out the deductions over the length of the loan.
A few words of Advice
Always ask for the cost to get a better rate, not what rate you get for
1 point
The banks issue rates and their costs, not what a point will get you, this
can cost you money asking the question the wrong way.
Always ask for more than one rate and the cost to get each rate.
Often, the prices from rate to rate are not standard and you can get a bargain
from rate to rate.
If 1/2 point save you 1/8% on interest rate, but 3/4 point gets you 1/2% better
on rate, you have a bargain.
The "average" is about 1/4% lower in rate for 1 point. Anytime
you get a lower rate for less than this average, you are getting a bargain.
The more points you pay, the lower the return.
In most cases, the best rates are available for between 1 to 2 points. When
you pay more than 2 points, you will likely need to stay in the home longer
than 10-12 years to realize the full potential of what you have paid.
Avoid the Points when this Makes your Downpayment less
than 20%
If you have enough to pay 20% down and avoid the additional charges that come
with PMI but paying a point will leave you only 15% down on this home, this
may not be a good idea.
The same rule applies when this will make your downpayment less than 10%.
For a borrower like you, this must be very carfully analyzed as to what this
will cost in the long term. In most cases, the answer is do not pay the points,
but there are exceptions.
If paying the points is the difference between 15% down and 10% down, there
is little difference between costs associated with the mortgage and you should
consider the points.
Seller's Concessions
Seller's Concessions are often used to pay the points for you. You pay a higher
price for the house, the extra is used to pay the points and you receive the
tax deduction.
In most cases, as long as the home will appraise for the higher value, you can
take advantage of lower mortgage payments just for writing the contract in a
way that will benefit you.
Here is an example of a Seller's Concession transaction.
The seller will sell you a home for $200,000 and you have 20% down or $20,000.
Your mortgage will then be for $180,000 and one point will cost you $1,800.
Instead of paying the point yourself, you structure the offer on the house to
read that you will pay $201,800 for the house if the seller pays the point for
you.
The seller still gets the $200,000 and you get a point paid for you. Winners
on both side.
Summary
The bottom line when it comes to paying points when you buy a home is if you
have the money spend it on points.
If you do not have the extra money, see if you can get a seller's concession.
The lower interest rate from the points will outweigh the higher price for the
house.
Be careful if paying the points will take money out of your available cash to
make a downpayment.
