Posted by Fletcher Accounting and Tax Service Inc.

Home Mortgage Points: A Quick Breakdown

Home Mortgage Points: A Quick Breakdown

There are different types of home mortgages structures around the world, paying for mortgage points is one of them. It’s a structure commonly practiced in the United States and may actually be a uniquely American approach to home financing according to anecdotal evidence. This article will quickly breakdown the different types of mortgage points and how you can take advantage of them.

What are mortgage points?

There are two varieties of mortgage points and they are origination points and discount points. Each point in both cases is usually equal to 1% of the total amount mortgaged. For example, one point is equal to $3,000 on a $300, 000 home loan.

Loan officers are compensated through the use of origination points. Requiring the payment of origination points isn’t always done by all mortgage providers but those that do are usually willing to do a fee negotiation. Discount points are prepaid interest and by each point purchase, the interest rate lowers on your mortgage by up to 0.25%. 

Origination points weren’t tax deductible before the passage of the new tax law in 2017 but on Schedule A discounts points could be deducted. Going forward, it becomes deductible but will be limited to the first $750,000 of a loan. It’s best to consult a tax professional to help determine if you could receive tax benefits from purchasing points as there is a now a higher standard deduction.

How does discount points works?

The answer to weather you should pay for discount points depends on how you understand thee mortgage payment structure. When you’re considering whether or not to pay for discount points, take a look at two primary factors. You save more the longer you plan to say in general if you purchase discount points.

Another factor you have to consider when purchasing discount points is whether or not you have enough money to pay for them. It’s common for most people to barely afford the down payment and closing costs on their home purchase and there isn’t enough money left to buy points.

You may find three discount points that are relative affordable on a $100,000 home but on a $500,000 you’ll have to face a cost of $15,000 for three points. This means you’ll be dealing with the traditional 20% downpayment of $100, 000 for that $500,000 home plus $15,000 - this is usually more than any buyer can afford.

Should you purchase mortgage points?

You may have heard of people saying that the amount save by paying for the points is nothing compare to when you use your money to invest in the stock market as it will generate a higher return. However, a homeowner would usually find getting into a mortgage they can’t afford manageable than the potential benefit they may harvest if they managed to select the correct investment. Being able to pay off the mortgage in most cases is more important.

Furthermore, there is also a motivation behind purchasing a home. You may be one of those people who hope to see their residence increase in value or like few people who purchase thier home for the sole purpose of investment. If you look at it from an investment perspective, it’s less likely for you to sell it for the simple reason that you’re going to have to find another place to live.

On the other hand, if your home gains in value, there’s a chance that the other homes in your area will increase in value as well which means selling your home will provide you enough money to purchase another home for almost the same price. In addition, you will likely have paid about triple the home's original selling price in principal and interest costs if you pay off your mortgage by taking the full 30 years. This will result to you, not making much in the way of real profit, if you sell at the higher price.

What should you keep in mind?

It’s advisable that you plan carefully and look at the numbers when purchasing a home because this is after all a major financial decision. Determine exactly if you can afford and how you’ll be able to get the monthly payment amount before you start shopping. This method applies to whether you’re making a large down payment, purchasing discount points or buying a less expensive home.

Take your time to shop around. Settling for the first mortgage package you come across with is a bad idea. Look for banks, other resources such as real estate agents, mortgage brokers and of course, the internet.

Fletcher Accounting and Tax Service Inc.
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