Mortgage Points: To Pay or Not to Pay

If William Shakespeare financed a home today he’d probably ask on the subject of mortgage points: “To pay or not to pay? That is the question.”

Homebuyers direct the same question to their real estate agents. Here are some perspectives:

In its simplest definition, a point is an additional loan fee that is paid to the lender in exchange for a lower interest rate. It’s called “buying down,” and it allows you to reduce your rate for the life of the loan.

Let’s say you secured a mortgage loan for $500,000 without points, at 4.6% on a 30-year mortgage, your payment would be approximately $2,560 a month. If you paid two points ($10,000), the interest rate in this example would go down to 4.1% and the monthly payment would decrease to around $2,415, a savings of $145 a month.

In this scenario, it would take you about eight years to recoup the money you paid up front, so if you are planning on staying in your home a while, this will save you money in the long-run.


Home buyers must answer some key questions to determine if paying points is a wise decision. Specifically:

• How long will you keep the home?

• Do you have extra money to pay points?

• Could that money be better used for something else?

Money managers may suggest that a smarter option is to invest that $10,000 because you could do much better than your $140 savings, but you have to weigh the variables.

“Paying points depends on your career, your interests and all the things that predict your future,” said financial advisor Thomas Watkins of Total Mortgage Services in Milford, Conn. “Points are paid up front while your savings will be spread out into the future. Therefore, you get more benefit if you own your home longer, or if you don’t refinance for a long time.”

The rule of thumb when it comes to points is simple: If you plan to stay in the house for less than three years, do not pay points. If you plan to stay in the house for more than five years, pay 1 to 2 points. If you’ll be in the house for three to five years, paying points doesn’t make a significant difference.

Another important aspect to consider: Since points are interest-payment related, they are fully deductible on your taxes in the year that you close. See your tax advisor for details.

Mortgage points can add up to valuable savings over the course of your loan, but the future isn’t always predictable. Even if you “plan” on staying in your home for 20 years, changes in your career or family life could alter the plan.

‘Tis the Season for Tax Breaks

With April 15 rapidly approaching many are scrambling to complete their taxes. For those who have recently bought or sold a home, there are a number of tax deductions that that may be available to them.

Real estate broker’s commissions, title insurance, legal fees, advertising costs, administrative costs, and inspection fees are all considered selling costs and may be used to reduce one’s taxable capital gain by the amount of the selling costs. That could result in a big savings depending on the final sale price.

Interest that is paid on a mortgage is also tax-deductible, within limits. A married couple filing jointly can deduct all their interest payments on a maximum of $1 million in mortgage debt secured by a first or second home.

Buyers may also be able to deduct some of the interest they paid on a home equity loan or similar line of credit.

One deduction that many buyers often overlook is points. Points or origination fees on a home loan that were paid during the purchase of a home are generally tax-deductible in full for the year in which they were paid.

Refinanced mortgage points are also deductible but only over the life of the loan – not all at once. Homeowners who refinance can immediately write off the balance of the old points and begin to amortize the new.

If your lender required private mortgage insurance, the PMI premiums are tax-deductible for mortgages taken out from 2007 through 2011.

Making improvements to property prior to the sale or once one moves in might qualify for an interest deduction on your home-improvement loan. Qualifying capital improvements are those that increase your home’s value, prolong its life, or adapt it to new uses, such as adding a porch or installing energy-efficient windows.

Many times during a sale, the seller will send the local tax collector’s office a check for real estate taxes prior to the closing. In many circumstances, however, the buyer will pay a pro-rated portion of the taxes for the year at closing. This tax deduction also gets overlooked.

For those working from their new home: If a room is used exclusively for business purposes, they may be able to deduct home costs related to that portion, such as a percentage of your insurance and repair costs, and depreciation.

In some instances, if you have moved because of a new job, moving costs may be deducted. These can include travel or transportation costs, expenses for lodging, and fees for storing your household goods.

Every year the tax laws change and certain tax deductions become available while others phase out. If you have recently bought or sold a home, it’s probably a good idea to seek out a professional tax consultant to do your taxes as missing deductions that you can legally claim can add up to quite a bit of money.

How To Make the Most Out of the $8000 Tax Credit

Three weeks ago, HUD Secretary Shaun Donovan announced a program that would allow borrowers to use the first-time homebuyer tax credit for a down payment or closing costs on an FHA insured mortgage at the NAR Mid-Year Conference. Forty-eight hours later that program was pulled due to insufficient details as to how to implement the program.

Last Friday, Secretary Donovan once again issued Mortgagee Letter 2009-15 detailing the guidelines of that program. Under the guidelines, FHA-approved lenders can develop bridge loans that home buyers can use to help cover their closing costs, buy down their interest rate, or put down more than the minimum 3.5 percent. However, according to senior HUD officials, loans cannot be used to cover the minimum 3.5 percent requirement. Thus, buyers applying for FHA-backed financing with an FHA-approved lender that offers a bridge-loan program can get a bridge-loan to significantly bring down the upfront costs of buying a home, but would still have to come up with the minimum 3.5 percent down-payment.

Secretary Donovan said “We think the policy is a real win for everyone, ensuring that borrowers can tap into the numerous organizations that are already part of the FHA network to receive this additional benefit.”

If you are a first-time home buyer and qualify for the tax credit this new program may be an option for you. Please keep in mind that you will need to have funds available for the 3.5 percent down-payment and you must close on the home by December 1, 2009. For more information about the tax credit visit my article titled First Time Home-Buyer Tax Credit FAQ's.

If you or anyone you know is interested in purchasing a home I would be happy to help you with your home search, no strings attached. Just contact me and I can have available homes that meet your criteria sent to your inbox, updated on a daily basis.

The First Step in Buying a Home-YOUR CREDIT REPORT!

All too often I am approached by a prospective home buyer who asks to look at a home they have fallen in love with only to have them end up in the situation where they can't get the home. The culprit....the dreaded credit report!!

The first step that a buyer should take when beginning the search for a home, before they talk to a Realtor, before they talk to a lender, even before they think of pulling up CENTURY21.com or Realtor.com, they should pull up their credit report. Consumers have the ability to pull up a free credit report online through sites such as FreeCreditReport.com and should do just that.

I recently read that over 70% of consumers reported that they have found errors in their credit report, with 25% of them being serious enough to either deny the consumer credit or significantly delay the process. With over 54 billion credit updates annually, it is very likely that you may have an error on your credit that you are not aware of. Many times these errors are negatively impacting your credit in such a manner as to deny your ability to get credit or to cause you to pay excessive interest expenses.

All consumers should routinely pull their credit reports to look for errors and have them correctly immediately. They need to be proactive in protecting their credit and become educated and understand how credit works. When a questionable activity is identified, it needs to be correctly immediately. Usually the first step in doing so is to notify the applicable credit reporting bureau.

If you are wanting to buy a home, do this and then call me to help you find that perfect home. If you have questions regarding your credit, contact me and I will help you answer them.

Downpayment-How Much?

Once you've found the home of your dreams, you'll be faced with financial decisions. Even though you have been pre-qualified, the amount of down payment will be your first consideration.
How much should you put down? And how does the amount affect your mortgage? Should you put down the least amount required, or as much as possible? The following are some tips and information you may find helpful in making the right decision for you.

Of course, you are always dependent on your specific financial situation. Very often first-time buyers are scraping together every available cent to make the minimum down payment. They may consider themselves fortunate to be able to do just that.

If you have more cash available, there are two ways to go. Some experts feel that you should make the smallest down payment that's acceptable to your lender. You will then have cash for emergencies, decorating, and any renovation that you want to do right away. You could also invest the extra funds. Weigh your options in dollars and cents. If you're trying to decide between putting 15 percent versus 20 percent down, and that difference is $5000, go with the 20 percent. You'll then save the cost of the PMI (Private Mortgage Insurance) which can really add up.

Generally, a 20% down payment is thought to be standard. If your home costs $100,000, you would be expected to come up with $20,000 in cash for the down payment, in addition to the closing costs. Many lenders believe that 20% down gives the homeowner a larger equity stake in the property, and thus decreases the likelihood of default.

Lenders today recognize that 20% of the purchase price is a great deal for most first-time buyers. As a result, different mortgage options have been developed to require a smaller down payment. For example, there are several mortgage options that will allow you to put down 10-15 percent. Conventional lenders will allow a smaller down payment if you agree to purchase private mortgage insurance. This insurance is paid monthly, along with your mortgage, until you have earned at least 20% equity in your property.

An FHA loan will require 3.5%-5% down. If you put down 3.5 percent, the FHA will accept a Community Development Block Grant, if one is available and you meet the guidelines, to make up the two percent difference.

A loan from the Veterans' Administration (VA) doesn't require any down payment. These loans are offered at a fixed rate that is set by the government, and the fees are low. These loans are available to honorably discharged veterans of the United States Armed Forces.

On the other hand, there is the argument that the more you put down, the less you pay back. The less the mortgage that you'll take and the less interest you'll end up paying. A greater down payment may eliminate the cost of private mortgage insurance. Talk to your lender, and run the numbers on a variety of scenarios. Then you can proceed in the manner that best serves you.

Copyright PropertySource Network 2009