Points – To Pay or Not to Pay

March 4, 2013

Paying points on a home loan is one way for home buyers to obtain a lower interest rate, which though it means more outlay of money upfront, in the long run can be a choice that’s budget conscious. Points are a form of pre-paid interest, generally calculated as one point per 1% of a home loan’s total sum, and are paid by the buyer in one lump sum at the closing table. By paying points upfront, a buyer has already paid down on a percentage of the loan’s interest, which is reflected in a lower interest rate that secures lower monthly payments.

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When deciding whether or not you’ll pay points at closing, there are a few facts to keep in mind. Points are completely deductable on your income tax, but only for the same tax year as your closing. Before committing to paying points, make sure that you’ll qualify for the tax deduction. Points are also only tax deductible if they’re paid on the original home loan. For refinancing, the IRS will require that you spread out the deduction over the life of the loan. 

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For example, you refinance at 30 years, you can only deduct 1/30th of the amount. However, if you pay off the loan early, even if it’s only five years later, you can deduct the entire remaining amount, but only for that tax year. As always, check with a tax professional before making any decisions about paying points.    

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