Paying Points on Loans – A Point Can Make All the Difference
When it time to think about all the different loan programs and comparing interest rates, homebuyers have a few chooses on a loan by paying points on loans to lower an interest rate. Paying points on a loan seems attractive when considering mortgage loans, because a lower interest rate means smaller monthly payments. But is paying points really always a good idea?
In the United States one side benefit of paying points on a loan mortgage is that they are fully tax deductible for the same tax year as your closing. So the answer to our previous quesetions is, “It depends.” Whether or not it makes financial sense to pay points typically depends on how long you are going to keep your loan. When you pay a point, you are paying money upfront to lower your interest rate. Points are calculated on the total loan balance and paid directly to the lender upon closing. One point is equal to 1 percentage point of the loan.
But is it worth it? By paying a point you can reduce your rate from the bank from 5.75% to 5.25%. You can find a number of loan calculators that allow the user to input all information even the points you plan to pay.
Here’s a quick calculation your buyers can use.
Potential purchase price of home: $400,000
Potential down payment: $50,000
Total loan amount: $350,000
Cost of one point to buy down the loan: $3,500
Monthly payment with no points at 5.75% interest: $2,042.00
Monthly payment with one point at 5.25% interest: $1,932.71
Savings by paying one point up front: $109.29 monthly; $1,311.48 annually; $39,344.40 over a 30-year loan term.
So to answer our original question–is paying points on loans a good idea? Usually, yes–but depending on your tax deductions gained and the length of time you’ll have the loan (Longer=more savings) then it may or may not be worth the upfront investment. Learn more about the ins and outs of ARM Mortgage Loans to help make informed decisions.