What Are Points and When Should You Pay Them?

Points are upfront fees paid to obtain a better interest rate on a loan. One point equals one percent of the loan amount. While a lower interest rate may result in a lower monthly payment, it is important to consider how long you intend have the loan and to compare current interest rates to historical trends. This will help you determine whether paying points is a worthwhile investment.

It’s also important to remember that interest rates run in cycles. When rates are at historical lows, it makes more sense to pay points if you plan to live in the home for an extended period of time. If it’s unlikely rates will go down in the near future, then there will be no need to refinance. When interest rates are high, however, there is a strong likelihood they will come down again before too long. Therefore, this is not a good time to pay points.

Tax deductibility is another thing to consider when choosing whether or not to pay points. Points paid on a purchase transaction are tax deductible upfront in the year of the purchase. The tax deduction for points paid on a refinance must be spread out over the term of the loan (unless the entire loan is paid off early), making points more costly in comparison to a purchase transaction.

Ultimately, there is much to bear in mind when considering points. At LoanCentral, we will work with you to determine the best course of action based upon your specific situation and needs.

~ Courtesy of Wendy Charles, LoanCentral LLC, 425.468.9321, WendyC@LoanCentral.com