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Seventy Four. What his portfolio

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Host and personal finance enthusiasts Diana,

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Miriam, Now let's get right to it

1:26

as we optimize your life. What

1:32

are mortgage points and should you buy them?

1:34

By Jeff Rose of goodfinancialsense.com.

1:39

You may have heard how mortgages come with

1:41

points, a polite synonym for fees or premiums.

1:44

Your lender charges for loan

1:46

origination or refinancing. Sound

1:48

familiar? Why would you want

1:50

points? Well, when you

1:52

buy a point or two along with your

1:55

mortgage, you get a lower interest rate and

1:57

lower monthly payments. Pay $3,000 for a

1:59

mortgage. for a point now, and

2:01

you could save that much and more later on

2:03

over the course of the loan. So

2:06

is it a no-brainer? Well, let's

2:08

talk about that. Are

2:10

mortgage points pointless? The

2:13

math on points is simple. One point

2:15

equals 1% of the amount of the loan you

2:17

take out, two points equals 2%, and

2:19

so forth. While

2:22

the math is easy, the real value of

2:24

a point is not always so simply calculated,

2:27

but it may seem pointless. The

2:30

problem is points don't move when you do. Who

2:33

stays in one home for 30 years these days?

2:36

If you have a 30-year loan and you sell

2:38

your home and move five years from now,

2:40

you lose the points and the benefits within.

2:43

The same applies when you refinance. There's

2:46

also the interest rate aspect. Let's

2:49

say you buy two points at 6% interest when

2:51

you get your mortgage. What if

2:54

two years later, interest rates fall to 4%? You'll

2:57

regret your purchase. Types

2:59

of points you can get. There

3:02

are three types of mortgage points you may encounter.

3:05

Discount points, what we're going to focus on. Origination

3:09

points and negative points. The

3:12

bulk of our discussion is going to look

3:14

at the advantages and disadvantages of discount points.

3:17

These are the points which lower your interest rate.

3:20

Before we dig into the discount points,

3:22

I'm going to quickly explain origination points

3:24

to help you understand the difference. They're

3:27

basically the fees you have to pay before the

3:29

insurance company will give you a mortgage. They're

3:32

essentially a nice way of saying fee. Should

3:36

you buy points or are they a scam? When

3:39

you're going through the mortgage application process, there

3:41

are dozens of factors you need to consider. It

3:44

can be a confusing process. When

3:46

trying to decide if you should buy mortgage points,

3:49

there's a simple equation you should do. You

3:51

need to calculate how long it will take you to

3:53

break even. Don't worry, the

3:55

math is simple. Take the cost

3:57

of the points and then divide the number by how. much

4:00

you'll save every month. The number you

4:02

get is how many months it will take for you

4:04

to break even. If you

4:06

want to make those points worth it, you'll need to

4:08

be in your home past the break even point. If

4:11

you don't plan on being in your home for that

4:13

long, then buying the points is a waste of money.

4:16

The average homeowner stays in their home for

4:18

13.2 years. Compared to 2020, that's down from

4:24

13.5 years. What this tells

4:26

me is for most people, the points

4:28

probably won't be worth the upfront cost,

4:31

but every situation is different. Do

4:33

those quick calculations and you can decide if

4:35

it's worth buying a point. Are

4:38

mortgage points tax deductible? Sometimes.

4:43

Usually, points are amortized over the duration

4:45

of your mortgage, that is paid

4:47

off in installment payments over the life of

4:49

the loan, but you might be able

4:51

to deduct the cost of these points at tax

4:53

time. If you took out

4:56

your mortgage to buy or refinance your primary

4:58

residence, you could qualify for a deduction in

5:00

the tax year you took out the loan,

5:02

if your loan meets certain conditions. The

5:05

IRS has a nine-point test

5:07

and the key points are,

5:09

number one, points must be a

5:11

percentage of a principal amount clearly defined

5:14

on the settlement statement. Number

5:16

two, points can be paid in

5:18

place of separately stated amounts elsewhere

5:21

on the settlement statement. Number

5:23

three, funds supplied by the

5:25

buyer plus points paid by the seller

5:28

must be equal to or greater than

5:30

points charged. Number

5:32

four, points charged must not be

5:34

excessive. And number

5:36

five, charging of points must be

5:39

an established business practice for

5:41

such a mortgage. If you

5:43

buy a home and the seller pays any points,

5:45

you can deduct those points. If

5:48

you're refinancing, there's no quick tax

5:50

break. Points have to

5:52

be amortized unless you're using part of the

5:54

loan for home improvement, then a

5:57

partial deduction is allowable. Negative.

6:00

A lesser-known

6:02

point is negative points. These

6:04

points are lender credits, and they actually cause

6:06

your interest rates to go up. Seems

6:09

like an odd choice, right? If

6:11

you use negative points, you don't pay for your

6:13

closing costs out of pocket. Instead

6:16

of paying your closing costs, you receive

6:18

a higher interest rate. The closing

6:20

costs will be paid by the higher monthly

6:22

payments. Just like with

6:24

mortgage points, you should decide how long you're going to

6:26

be living in the home. If

6:28

you plan on sticking around for 20 years, these points

6:30

are going to be a waste of money. They

6:33

work as an inverse. The

6:36

bottom line, what are mortgage points and should

6:38

you buy them? Mortgage

6:40

points, representing an upfront fee to

6:43

lower interest rates, may initially seem

6:45

attractive, especially with the promise of

6:47

lower monthly payments. However,

6:49

the true value of purchasing points gets

6:52

muddied when considering modern home ownership trends,

6:54

where the length of stay in a

6:56

single home is often shorter than the

6:59

break-even point. Furthermore, fluctuating

7:01

interest rates can also impact

7:03

the perceived savings from points.

7:06

The option of negative points, offering

7:08

a workaround for closing costs at

7:10

the expense of higher interest rates,

7:12

also presents a contrary avenue. Ultimately,

7:15

the decision to buy points is

7:17

a personal one, hinged on individual

7:20

financial circumstances and long-term living plans.

7:23

It's prudent to engage with a

7:25

mortgage professional to fully understand the

7:27

implications before making such a decision.

7:34

You just listened to the post titled, What Are

7:37

Mortgage Points? And Should You Buy Them? By

7:39

Jeff Rose of goodfinancialsense.com. And

7:42

I'll be right back with my commentary. If

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I didn't buy mortgage points when buying my

9:01

house, I do recall considering it.

9:04

The challenge for me was just the uncertainty,

9:07

because if you buy points and then the

9:09

interest rates drop, you would have been better

9:11

off waiting and then refinancing. I

9:14

was also buying a house far below my means.

9:16

My mortgage payment was already very low, and

9:19

I bought at a time when interest rates were already below

9:21

5%. I didn't

9:23

feel the need to pay more upfront for

9:26

a lower interest rate. Another

9:28

thing to consider is if you have the cash on

9:30

hand to buy points. Many

9:32

people struggle to pull together a 20% down

9:35

payment or struggle to have the

9:37

financial bandwidth for the repairs and

9:39

maintenance required for homeownership. If

9:42

buying points affect your ability to

9:44

put 20% down, the added cost

9:46

of PMI might negate the interest

9:48

savings. If you want

9:51

to save on interest but maintain flexibility,

9:53

perhaps making extra-principal-only payments on your mortgage

9:55

is the way to go. You'll

9:57

save on interest over the life of your loan without a having

10:00

to pay it upfront. As

10:02

with most things in personal finance, it

10:04

really depends on your situation. So it's

10:06

always best to run the numbers as

10:08

Jeff recommended in this article. And

10:11

that should do it for today. Have a happy rest

10:13

of your day and I'll see you on the Friday

10:15

show tomorrow where your optimal life awaits.