Should You Pay Discount Points?

It depends on how long you plan to keep the mortgage

“Points” are mortgage loan costs typically in association with an interest rate. One point is equal to 1 percent of the loan amount, so one point on a $200,000 loan is $2,000. It’s good to pay them, right? Or wait, it’s not good to pay them, right?
The correct answer is “yes.” It is good and it’s not good. So how do you tell?

Points are often looked upon as “prepaid interest,” hence the potential tax deductibility. If you paid points last year for your new home then you may be entitled to deduct those points from your taxable income before you send more money to Uncle Sam. Note, the tax deductibility can vary for points between purchase and refinance transactions. Points paid during a refinance are usually only deducted over the term of the mortgage. With a purchase, points may be tax deductible for the year paid.

 

Written By: David Reed. If you would like to continue reading, click here.

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