Feb 18 2009

Mortgages and Refinancing: Points or No Points?

Points or No Points:  That Is the Question

In order to ascertain whether or not to opt for points or no points when looking at getting a mortgage or refinancing, let’s first describe what mortgage points are.

Mortgage points are fees paid in order to obtain a mortgage.  Each point is based on 1% of the total amount of the loan.  The most commonly known points are called discount points.

According to Mortgage News Daily, discount points are monies paid to the lender to acquire a loan with a specific interest rate.  Here is an example:

If a loan is for $100,000, one point is worth $1,000.  Each point one purchases will therefore lower his or her interest rate by some amount.

Most borrowers will be able to decide how many points they wish to purchase.  However, they are usually limited to purchasing around four points.

Discount points are paid at closing, but do not apply to buyers who obtain FHA or VA guaranteed loans.

According to Smart Money, there are only a few states that allow you to deduct discount points (North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Missouri and Arkansas)/

Even then, deducting discount points is restricted to certain circumstances.

You may also be able to deduct a portion of your points if you refinance your mortgage to raise money for home improvements, regardless of which state you call home.

Moreover, it takes about five to seven years to recoup the cost of paying a point upfront, according to the article.

What does this mean in real terms?  Here is an example:

Let’s say you take out a $100,000 30-year fixed mortgage, and you have the option of either paying 6% with no points or 5 3/4% with one point.

With the 6% mortgage, your monthly payment will be $600.  And with the 5 3/4% loan, it would be $584, a savings of $16 per month.  After about 62 months, or a little over five years, you would have recouped the $1,000 point you paid upfront.

If you fall into a higher tax bracket, however, you may not need to add any points to your refinanced mortgage.

On the other hand, if you cannot afford refinancing without adding points, experts advise that you add the points depending upon how long you plan to maintain the loan, specifically, six years or longer.

Mortgage and refinancing options are much tougher than they used to be, and they are big commitments for you and the whole family. The key thing is to understand your points, so you can make the right choice financially for you and your whole family.