- 1). Compare the total payments on your mortgage to see if you can save money over the life of the loan by buying down the rate by paying points. A point is equal to 1 percent of the total loan balance, so the rate will probably need to drop at least 1/4 percent in order to be cost-effective. For example, if you have a $150,000 30-year loan charging 6 percent interest, then you will pay a total of $322,146.55 in principal and interest over the life of the loan. If you were to pay 2 points and lower the interest rate by 1/2 percent, then you would only pay $311,311.34 for the same loan.
- 2). Ask your mortgage lender or broker if you can buy points (you almost always can). See if you can negotiate how much your rate is lowered. You should get your rate lowered at least enough to reduce the total amount you will pay over the life of the loan.
- 3). Decide how many points you want to buy. If buying a single point is cost effective, then buying down two to three points may be even smarter, if you can spare the cash. Examine your cash flow for the year versus your projected cash flow in future years. If you are nearing retirement and expect your cash flow to be much lower after you stop working, then buying points now while you have the cash may make your retirement budget much easier to manage because of the resultant lower mortgage payments.
- 4). Look carefully at your HUD statement at closing to ensure that the proper number of points have been listed on the correct line of the form. Your HUD statement is a legal-sized sheet of paper that lists all of the costs and terms of your loan that is prepared by the title company and signed by you at the closing. They should be clearly listed on the "points paid" line of the HUD. The equivalent dollar amount should be added on to your total mortgage balance.
- 5). Be sure to take the proper tax deduction for your points paid. If you are buying a house, then you can deduct the total amount paid in the year you close on the loan. If you are refinancing, then you must prorate the amount of points paid equally over the life of the loan. For example, if you paid two points worth $3,000 total on a 30-year refinancing, then you could deduct an additional $100 each year on top of your annual mortgage interest reported on Form 1098. Report all points paid on Schedule A of the 1040 federal tax return.
SHARE
