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Points can be paid up front by the borrower or rolled into the loan amount depending on the loan and the lender, and some wonder if they should purchase points as they are planning and saving for the new loan. When is it a good idea for borrowers to purchase discount points?

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FHA Home Loan Discount Points

January 8, 2021

FHA Home Loan Discount Points
What are home loan discount points? Investopedia defines them as “...a prepaid interest payment that borrowers can choose to pay so as to lower the interest on future payments.” Points can be paid up front by the borrower or rolled into the loan amount depending on the loan and the lender, and some wonder if they should purchase points as they are planning and saving for the new loan.

The Consumer Financial Protection Bureau reminds consumers that when considering discount points, you are contemplating a “tradeoff between your upfront costs and your monthly payment. By paying points, you pay more upfront, but you receive a lower interest rate and therefore pay less over time.”

The question of home loan discount points--and whether you should invest in them or not--depends greatly on your financial goals and plans for the home. When you are saving for your home loan expenses, you should anticipate your closing costs including the down payment, appraisal fees, and other expenses.

If you choose to buy discount points you’ll need to decide how much you’re willing to set aside for the points in addition to the other expenses you must pay.

When are discount points a good purchase?

If you don’t plan to sell or refinance your loan anytime soon, you may do well to buy points because doing so can save money over the long haul. Selling or refinancing can nullify the savings you would realize with points. Basically the longer you pay on the mortgage, the more it makes sense to have bought the points. Discount points are a tool you use to save money across the entire term of the loan; it’s a cumulative effect.

Some who buy discount points may be motivated to do so thanks to another potential type of savings. They want to get any tax breaks that might be coming, and depending on what deductions are claimed on a given year’s federal IRS forms, tax breaks may be available. However, that depends greatly on current year tax regulations published by the IRS as well as the way you file your taxes.

For example, those who take the standard deduction cannot deduct mortgage loan interest or discount points; you must itemize these deductions using Schedule A on IRS Form 1040. Depending on the type of transaction you may be entitled to a 100% deduction, but refinances may not be included in this.

None of this should be construed as tax advice, and if you have questions about the tax implications of your home loan and/or buying discount points you should consult a tax professional. But this SHOULD be considered as food for thought about your options and the long term plans you have for buying a home.

Points make sense for borrowers with a plan; if you don’t know whether you’re going to sell or refinance your home at some point early or even mid-way through the mortgage, it may be wise to table any consideration of points until you have a better idea of your mid-term or long-term plans.

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