Using Mortgage Discount Points Effectively

MMortgages can be confusing so it is important to understand mortgage points and how they can affect you financially at closing. Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. By paying the discount points up front at closing, it is possible to lower your monthly mortgage payments for the duration of your mortgage. There are several things to consider when deciding if discount points are right for you. 

Will You Break Even?

A key factor to discount points is how long you plan to stay in your home. If you are planning to move or refinance in a few years, paying points is probably not a good move. You must consider how long it will take to recoup the cost of buying points. This is a simple math equation: divide the cost of the points by how much you save on your monthly payments. The result of this calculation is how long it takes for the monthly payment savings to equal the cost of the points. If you reach a number of 20 months and you plan on selling the house in two years, it is probably not a good investment to use the discount points. 

Monthly Payment Consideration

Monthly mortgage payments are calculated using a few factors: interest rate, loan amount, and the length of the loan. If you reduce any of these items, the monthly payment will also go down. It is important to understand that lowering the monthly payment with a higher down payment versus lowering the monthly payment by buying points can have drastically different results. 

Are Points Tax-Deductible?

Discount points are deductible as mortgage interest on a primary residence or on a second home that is being rented out. However, there are restrictions. One of the restrictions is that the money to buy the points must be paid directly to the lender and not borrowed. Always ask your tax adviser if you have questions about mortgage point deductions. 

How to Decide

Estimate how long you are going to keep your loan. Knowing you will stay in your home for a longer period of time, say until your kids graduate, you may be better off paying points and paying the lower interest rate. Calculate the breakeven point listed above. Figure out how much you may save each month on the payment and how long it will take to get that money back. Remember that if you pay points your total interest costs may also be different saving money in the long term. Discount points could possibly give you a tax deduction today yet the interest over the years is tax deductible as well. 

Planning for the Long Run

Mortgage discount points are not something to take lightly. If they are an option, it might be in your best interest to sit down and do your homework and decide what is best for you financially in the long term. A home is a worthy investment and a mortgage can be a significant undertaking so plan ahead to keep your future on track.

Looking for more information about using mortgage points for your San Marcos real estate? Contact The Damron Group REALTORS, a real estate agency in San Marcos, TX, to speak to a professional.

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