To Pay Points or Not to Pay Points
Whether or not to pay points on your mortgage is really just a matter of asking yourself two questions.
Whether or not to pay points is really just a matter of figuring out (a) whether you can afford to pay one-percent of the mortgage amount in addition to the rest of your closing costs, and (b) whether it is worthwhile to do so. If I were you, I'd ask your mortgage professional to tell you how much:
- The lender will reduce your interest rate if you pay a point; and
- How much money this will save you over the years you plan to be in the mortgage or over your introductory rate period, if you have an ARM - not over the life of your loan.
From there, deciding whether to pay points is a simple compare-and-contrast exercise. If it will save you more than it costs, it might be worth it. If you need the cash for closing costs or whatever else, though, it isn't worth it no matter how much it saves you. One caveat - if it's pretty near the end of the year, and you anticipate having to write a big check to Uncle Sam next April, you might think very seriously about paying points. If you do, the entire amount of the points you pay is tax deductible the next time you file a tax return, and paying them can drastically improve your tax situation next year, while decreasing your monthly mortgage payments at the same time. Don't take my word for it - ask your CPA.