After several years of diligently saving money, I’m nearly ready to purchase my first home. Because I’ve been thinking about buying a home for so long, I know exactly what I want my house to look like. I desire a place that has three bedrooms and three bathrooms. I also need a quiet space to set up my home office in. I want a massive, walk-in closet in my master bedroom. My master bathroom needs to have double vanities, a tiled, walk-in shower, and a Jacuzzi tub. On this blog, I hope you will discover how to set priorities during your new home search. Enjoy!
In advertisements promoting mortgage loans, it is usually the interest rate that is the focus of attention. One reason advertised rates vary is that many lenders charge an additional fee referred to as mortgage points. Prospective home buyers can compare the long-term costs of competing mortgages by calculating the net effect of the interest rate and mortgage points combined.
Points are sometimes referred to as mortgage origination fees. Despite the connotation, points are a specific monetary amount paid up front in exchange for a lower interest rate. Over the lifetime of a mortgage, a lower interest rate may eventually save more than the initial outlay of points. As such, there is a trade-off between the two main financial aspects of a mortgage offer.
Interest rate versus points
Each point is equal to 1 percent of the original amount of mortgage principal. Based on the expected savings from the interest rate reduction, you can calculate how long it would take to recoup any points paid up front. At some point in the future, the savings due to a lower interest rate may even exceed the initial cost of points. Therefore, the payment of points is generally favorable if you intend to live in the home past that break-even juncture.
Some prospective home buyers monitor advertised interest rates almost daily once they begin looking at residential properties for sale, because market conditions tend to fluctuate slightly. It is difficult to predict interest rates, but there are other factors that also might affect your choice of mortgage. After taking out a home loan, points paid up front may qualify you for the same tax deduction as mortgage interest.
Potential tax deductions
Various categories of loan expenses are sometimes broadly categorized as loan origination fees. To be tax-deductible, the cost of points must be paid solely as prepaid interest on borrowed money. Mortgage interest and points are both itemized deductions, so they can produce tax advantages only if you itemize deductions on your income tax return.
Tax deduction timing
Sometimes in the first year of a mortgage, the interest paid for a portion of the year is not enough to justify itemizing deductions. Points are normally deductible over the life of a mortgage. However, points may be deductible in the first year of a mortgage if certain conditions are met.The combination of first-year interest and the total points paid may be enough to allow you to itemize deductions.
In subsequent years, a full year of interest is more likely to result in enough deductions to justify itemizing. If you choose not to deduct points in the first year of a loan, the points can be deducted equally over the life of the mortgage.