|
When do you pay points?
Dear Dollar Diva,
I know that points can be used to lower interest
rates. What else should I know about them? Is a real estate agent's
commission included in these points?
Points are finance charges that are paid upfront.
Each point is equal to one percent of the loan amount; i.e. on a
$100,000 mortgage, one point will cost you $1,000; two points, $2,000.
Points are tax-deductible. They are also negotiable: to close a
deal you can sometimes get the lender to waive them or the seller
to pay them.
Points come in two flavors: (1) Discount or prepaid
interest: The more you pay upfront in points, the lower your interest
rate. (2) Origination fee: Paid for the privilege of getting a mortgage.
It often includes a sales commission, but not the real estate agent's;
he gets his from listing or selling a home, not from the mortgage.
Should I pay points?
When should you pay points, and when should you
not? Here's a rule of thumb: consider paying points if you plan
on owning your home, and keeping your mortgage for a very long time;
do not if you only expect to own your home for a couple of years.
The Diva offers this quick-and-dirty calculation to
compare a mortgage with points against a mortgage without points:
Divide the number of points by the number of years
you expect to hold the mortgage. Add the resulting fraction to the
interest rate of the loan with the points. Compare against mortgage
with no points.
Points are not refundable, and that's a big negative.
You're laying out a lot of front money, and will not get a pro-rata
refund if you decide to move or refinance before the loan term is
over. Even worse, if you're scratching to put 20 percent down on
your new home, the points could put you on the wrong side of the
equation, and cost you a bundle for private mortgage insurance.
Before you go shopping for a mortgage make sure you
read "Dollar
Diva's 10 tips for mortgage shoppers." It could save you some
money.
-- Posted: April 19, 2001
 DOROTHY
ROSEN has a master's degree in finance, with a specialization in
accounting, from the Kellogg Graduate School at Northwestern University
in Evanston, Ill. Rosen has more than 15 years of experience in
the financial arena, serving in Illinois and Florida as a certified
public accountant, financial consultant, expert witness and educator.
She is owner of Dorothy Rosen, CPA, a public accounting firm that
serves individuals and small businesses.
-- Posted: April 19, 2001 |
