Paying Points For A Lower Rate

Analzying various interest rates and associated points may save you money. As a rule of thumb, each point adds about one-eighth to one-quarter of one percent to the interest rate the mortgage company is offering.

Generally, the lower the interest rate on the loan, the more points the lending institution will charge. Some companies offer refinancing with no points, but generally charge higher interest rates.

To decide what combination of rate and points is best for you, balance the amount you can pay up front with the amount you can pay monthly. The less time that you keep the loan, the more expensive points become. If you plan to stay in your house for a long time, then it may be worthwhile to pay additional points to obtain a lower interest rate. Some companies may offer to finance the points so that you do not have to pay them up front. This means that the points will be added to your loan balance, and you will pay a finance charge on them. Although this may enable you to get the financing, it also will increase the amount of your monthly payments.

Your Personal Income Taxes

With a lower interest rate on your home loan, you will have less interest to deduct on your income tax return. That, of course, may increase your tax payments and decrease the total savings you might obtain from a new, lower-interest mortgage.

You should be aware of an Internal Revenue Service (IRS) ruling with respect to points paid solely for refinancing your home mortgage. IRS regulations require that interest (points) paid up front for refinancing must be deducted over the life of the loan, not in the year you refinance, unless the loan is for home improvements. This means that if you paid a certain number of points, you would have to spread the tax deduction for those points over the life of the loan. If, however, the loan or a portion of the loan is for home improvements, you may be able to deduct the points or a portion of the points. Check with the IRS regarding the current rulings on refinancing, particularly if you are using the new loan to make home improvements.