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Points are everywhere. Pencils have points; pins have points. Conversations have points. Points can be earned; points can be lost. Points can be counted; points can be made. And in real estate, points can be paid.
In real estate, points are your mortgage’s interest, your property taxes and your loan fees. They are the little things that push the cost of financing your new home, along with closing costs and down payments, up ever so slightly. They could be what makes you unable to afford the house of your dreams. They can be an utter nuisance, something you have no desire to focus on, as they are another slash in your checkbook, and another blow to your steadily decreasing account. At least, that’s what they may seem like when you first encounter them, but that’s not all they’re cracked up to be.
Points are also tax deductible. In Austin and the United States as a whole, points are tax deductible - 100 percent in the year you pay them. And generally, a point is equal to one percent of your mortgage. So if you have a $100,000 mortgage, you’ll pay only $1,000 and write it off the next time you have to pay taxes. Your savings will be high, extremely high during your first few years with the mortgage particularly.
Another benefit of points is that they can often be used to obtain a mortgage with a lower interest rate. Banks will give you a deal if you agree to pay one, three or five points. You pay a little bit right up front but considerably less in the coming months, making the deal seem too good to be true.
Is it?
That depends. As far as the lower mortgage interest rates, you first want to consider how long you’ll be living in your home. If you plan to stay there for the remainder of your days, then the interest rate is certainly something you want to consider and most likely accept. But if you plan on staying there for only a few years, you have to do the math. Will paying a lot up front actually cost you more than the original monthly payments? If so, you’ve found yourself in a situation where paying points will do little to no good.
The same is true if you are refinancing your mortgage, as in that case your points are not fully tax deductible. The IRS requires you to spread out payments on a refinanced loan over the life of the original loan, so you may only be able to deduct a small portion of the points you paid, and since you can’t deduct points not paid in the current tax year, the remaining points, not written off, will simply be money you signed away with no benefit.
As tempting as paying points and reaping the rewards may be, you have to consider the ramifications of the act first. Will you actually end up saving money by spending more now, or will they only add to the cost of financing your home? Can you deduct them? Can you use them to get lower interest rates? Points are good and bad for different people. Know which kind you are before you make a decision.
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