The case for avoiding points

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The points paid on a first mortgage when you purchase a home are fully deductible on your federal taxes that year. An example might be where the borrower makes a payment based on a low 4% rate but the actual rate being charged is 8%. Still, there are so many options out there, why be stuck with a lemon like a pre-pay? NEGATIVE AMORTIZATION Negative amortization is when the loan balance increases rather than decreases. So now your choice is: put the $2,000 toward the down payment, or pay the point and save $19 each month going forward. Lets look at an example: You take on a $200,000 mortgage with a 30-year fixed rate.75-percent/one-point option equates to a $1,433 monthly payment, but with $2,000 paid up front. Unfortunately, there are many ways to get hurt when shopping for the best rate: Short Pricing It is not necessary for lenders to state the lock-in duration when advertising a rate, so while a rate may sound good, it may not allow enough time for you to close on your loan. The only time you pay the penalty with a soft pre-payment penalty is if you refinance. I don’t like prepayment penalties under any circumstance and would do my best to avoid them.

That can be a big mistake. The 7. If that werent enough, after you pick your mortgage, you then have to decide whether to pay points, and how many. In turn, you might respond by saying: I plan to live here more than five years, so the point makes sense. But you should keep it and put it toward a sure thing, like cutting your loan size. All this brings us to the average life of a mortgage, which is less than five years. The Mortgage Bankers Association says the typical homeowner refinances once in nine years.75-percent/one-point option equates to a $1,433 monthly payment, but with $2,000 paid up front. What is a point, anyway? Points are prepaid interest. Most people dont ask how long the quoted rate is guaranteed for so make sure you do! Low Ball Pricing Some companies will lure you into a mortgage application with promises of a low rate, only to have the rate changes for the worse just before closing. Generally, one point equals a quarter of a percentage point. You can pay a point, you can invest it, you can pay down other debt, or you can put it toward a bigger down payment on your house. Thats because the tax treatment is less favorable. Heres why. If you are getting a great deal on a loan that has a pre-payment penalty, try to keep it to a one-year period. This changes the original choice you were faced with above. People are often tempted to pay points because it will reduce their interest rate. The difference between what is being charged and the amount paid is added to the loan balance.75 percent with one point, or 7. What you see isnt always what you get. But on a refinance, you must amortize those points over the life of the loan. Thats one of the selling points of points to begin with.

The case for avoiding points is even more compelling when you refinance a mortgage. Products With all the different products and options available, borrowers need a good mortgage professional to help choose the right one that will best suit their needs and goals. POINTS vs. But in the real world, it usually doesnt work out that way. One point equals one percent of the mortgage amount. Worse yet, its the kind of mistake that goes unnoticed. The 7. The simple calculation is flawed; thats the whole problem. Additionally, make sure it’s a “soft” pre-payment penalty. So your choice is: save $2,000 now, or save $34 each month going forward. The average family changes residences about every nine years, according to the National Association of Realtors. Now when you do the quick math: you will divide $2,000 by $19 and come up with about 105 months, or nearly nine years. Lenders love to take your point money. The question really boils down to how you can best use that $2,000. This is probably how some mortgage bankers will explain it to you. Its quite natural for you to make a few quick math calculations: $2,000 divided by $34 equals roughly 59. So, more often than not, borrowers will find themselves with a new mortgage before one point pays off. It is not nearly as important to shop rates as it is to shop for a reputable lender. One point on a $200,000 mortgage is $2,000. This is a dangerous game and is offered in exchange for a lower payment. That means there is no penalty if you sell your home, and you can reduce your principal up to 20% per year. . And why not? If it saves you money in the long run, then it must be good. After all, a mortgage is typically the largest financial transaction people make in their lifetime. This is one case where simplicity isnt good. So 59 months (nearly five years) from now, the point you paid will pay for itself.RATE SHOPPING Most people will check the Internet or pick up the newspaper to look up current interest rates.

Your lender offers 8 percent with no points, or 7. The 8-percent/zero-point option equates to a monthly mortgage payment of $1,467. Now the choice is: The 8-percent/zero-point option gets a monthly mortgage payment of $1,452 with the lower starting balance. After hearing about all the options Foam roller and products, your head is probably spinning. And first-time homebuyers move frequently. NO POINTS So youre in the market for a mortgage.50 percent with two points, and so on. Its not a hard and fast rule, but it usually works out that way. PRE-PAYMENT PENALTIES Watch out for pre-payment penalties. They may tell you your rate has expired or that the program is no longer available, or they may even delay the closing to break the lock. It is far more costly to get the best rate on the wrong product that it is to get a competitive rate on the right program for you. If you plow it into the down payment, now you have a mortgage balance of $198,000. Just like a credit card! You pay interest on the interest as well (ouch). This isnt quite the no-brainer the previous decision was.