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Should You Pay Points?
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To own a home is highly critical to your financial security. Statistics reveal that for more than eighty five percent of the millionaires in the U.S, real estate is a main ingredient of their wealth. The main reason for people to cling to real estate is it benefits you with a lot of financial freedom. The tax reduction you can gain on mortgage interest and property tax is a real plus. A fixed income and a depreciation reduction in case of the property are real advantages.
When you decide for mortgaging, one question you have to answer is whether you should pay points. Point is an amount equal to one percent of the principal amount of the investment. When a loan is borrowed, whatever kind it may be, they go in for a period of fifteen to thirty years. The interest levied on these loans may be high or low. A lower interest rate may allow you to borrow more money than a high rate with the same monthly payment. It is always better to choose a rate 'lock in' which guarantees a specific interest rate for a certain period of time. This annual percentage rate shows the cost inclusive of points, mortgage insurance and other fees.
Discount points are always better to choose. This allows you to lower your interest rate. It is essentially a prepaid interest and each point equals one percentage of the total loan amount. The sensex for each point paid on an average thirty year mortgage, the interest is reduced by 0.125 of a percentage point. It is safe to take loans with an interest rate with zero points and to check how the rate decreases with each point paid.
Discount points are a smart decision if the buyer plans to stay in the home for sometime, since they can lower the monthly loan payments. Points are advantageous as they are tax deductible when a home is purchased. Sometimes, the seller can be negotiated to pay for some of these points. It is a fee charged by a lender as an additional compensation for making the loan. Points can be best understood as a one time charge by the lender to increase the yield of a loan. It is equal to one percentage of the loan amount and is paid at the closing. This generally 'buys down' the interest rate. The points may be paid upfront and they are deductible on the income taxes in the year they are paid.
The decision on pay points can be taken after a proper analysis. Suppose you are on the look out for a $200000 loan. The cost of one point on the above loan $2000. Using simple mathematics, you can find out the benefit you get on going for low interest rate. On doing so if the break even number of months is less than the number of months you plan to utilize the house then it's better to pay points. However, the tax reduction you obtain by paying points also has to be taken care of.
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