Should you Buy Down a Mortgage Loan?
Conventional wisdom by mortgage professionals was to never pay points when refinancing or at the closing of a real estate sale. Mortgage “points” are equal to 1% of the loan amount, and are paid at closing in order to lower a mortgage interest rate. Lowering the interest rate should lower your payments, and has the benefit, over time, of significantly reducing the total amount in interest paid on the principal amount borrowed.
Due the enormous changes have taken place in the mortgage business, the investors that purchase mortgages are demanding higher up-front fees for borrowers with credit scores below 740, and mortgage lenders don’t have as much flexibility when pricing loans. The lending experts say this means that the interest rate savings can be very significant when you pay up front points. This applies to when you refinance your mortgage or when you use a loan to purchase a home.
A buyer can try to negotiate into the purchase contract for the seller to pay points on the buyer’s behalf. Besides the significant interest and payment savings the buyer will enjoy, accountants say that the buyer will receive a tax deduction this year for points paid – either by the buyer, or the seller on your behalf. Therefore, if you are selling a home, an offer to pay points for potential buyers may be a smart addition to the marketing efforts. This will make your property more affordable (as the buyer’s payment will be lower), and may help your listing stand out from the glut of the homes available in today’s market.
The mortgage experts also advise that you estimate how long you will stay in the home (or loan) before agreeing on pay points on your own behalf. A number of web sites offer mortgage calculators that can help you determine when, and whether, you will break even based on a guessimated length of the loan. One such mortgage calculator can be found at www.interest.com/content /calculators/discount.asp. Be careful of dated information still available on this subject, that generally recommends that you not pay upfront points.
At SimplySOLD we work with a variety of mortgage professionals who can help you determine if it make sense to pay points, as well as accountants we trust that can give you the requisite tax advice. If you need a name or a referral, email me at firstname.lastname@example.org.
– N. Mark Kramoltz © 2015