Question:

Are discount points tax deductible and should you buy points?

Answer:

Mortgage discount points are tax deductible and paying points is used to buy down the interest rate; sometimes it is a good choice, sometimes not. Mortgage discount points are percentage of the loan amount paid to the lender in exchange for lower rate.

Should you pay for points to get the lower rate?

Discount points on a home loan are tax deductible even if the seller paid for them. However, tax deductions on discount points are not a reason you buy them. You may not need to buy points if you are not staying in the house long enough, or if points are expensive. If the seller pays for them, though, you could use the reduction in the monthly mortgage payment.

How do I decide if I should buy discount points, or not?

It depends on the rate/point combination the lender offers. It is a standard assumption that a 0.125% interest rate reduction on a 30-year mortgage loan would cost around 1 point (1% of the loan) paid upfront. However, the range of mortgage rate/point/cost combinations varies greatly among lenders and it pays to shop.

In general, if paying points of X amount cuts your monthly payment by Y, X divided by Y gives you the break even period in months.

For example, if you pay $6000 in points on a 30-year, $300,000 mortgage to get a rate of 5.75% down from 6% with no points, your monthly payment will go down with around $48. 6000 divided by 48 is 125 monthly payment periods, or approximately 10 years 5 months to break even. That is, without considering the rate of return of other investments you could have used this cash for.

Just use some web mortgage points calculator to get an idea how your monthly payment will change and whether you will be staying in your home for so long as to make sense to pay for those points.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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