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One of the most expensive and profitable things a person can do in life is to buy a house. There are some strategies that we can make use of to reduce the interest on a mortgage. This is the case with mortgage points.
What are Mortgage Points?
Mortgage points are a fee that a borrower pays to a lender to reduce the interest rate on the loan. They also be called discount points. For each point the borrower purchases, it costs 1% of the mortgage amount. Or, $1,000 for every $100,000. In short, the borrower pays interest upfront to get a lower interest rate for as long as they are paying off the loan.
Breakeven Period or Breakeven Point
The time it takes for the borrower to recover the cost of purchasing mortgage points is called the break-even period. To calculate this time, simply divide the cost of the points by the amount of money you save on your monthly debt payment. The result is the time it takes for the monthly payment savings to equal the cost of the points.
$4,000/ $65 = 61 months
This indicates that the borrower must stay in the home 61 months to recoup the cost of the mortgage points they purchased,
This strategy should be pursued in the event that the borrower plans to keep the home they have purchased for a long period of time. If this is not the case, it is likely that he will not be able to recover the cost he has invested in the discount points.
How Do Mortgage Points Help Reduce Interest Costs?
If you have the ability to purchase mortgage points in addition to your down payment and closing costs, purchasing discount points is a decision that can help you reduce your monthly mortgage payments and save you a lot of money. The key to recouping the cost of the points is to stay in the home long enough to recoup the money invested in the interest paid upfront. If you sell shortly after you buy it, refinance the mortgage, or pay it off, having purchased the mortgage points will have been a significant loss of money.
Are Mortgage Points Tax Deductible?
Discount points are prepaid interest and are tax-deductible on up to $750,000 of a mortgage loan. However, taxpayers wishing to deduct mortgage interest and points must include the deduction on Schedule A of Form 1040.
It is important to note that not all mortgage points paid in the same tax year can usually be deducted. Points can be deducted over the life of the mortgage per year.
Remember to consult a tax professional for guidance and information on which expenses involved in buying a home are tax-deductible.
We Can Help
As mentioned above, buying mortgage points to reduce your mortgage interest rate has benefits only if you plan to stay in the home for a long period of time. The amount you save per month will make it worth all the upfront costs including the discount points.
If you don’t have enough money to cover all the costs of buying a home, you may want to think about whether it’s worth the extra financial effort to pay mortgage points. You can find another strategy to save a little money or reduce your monthly debt payments. Consult an expert to guide you so you can successfully carry out these strategies.