With interest rates hovering around historical lows (currently averaging 3.57 percent interest on 15-year loans and 4.17 percent for 30-year loans; see Mortgage rates continue record slide) many prospective buyers are looking into the loan process and many existing borrowers are considering refinancing.
I frequently get asked about the home loan process, and the various loan products available. One question that inevitably arises during the conversation concerns discount points. “What are they?”; “Are they worth paying?”; etc. So, for those readers considering a mortgage or refinance I thought I would provide the skinny on “points”. The following information was provided to me by one of my colleagues in the local lending industry. Thank you to Michele Weiss from Prospect Mortgage. [Note: Michele Weiss’ contact info follows.]
- Discount points are fees paid to a lender in order to purchase a lower interest rate. This process is also known as a "rate buydown" and the net result is a lower monthly mortgage payment over the life of the loan.
- One point is 1% of the loan amount. So the cost — paid at closing — for one point on a loan of $100,000 is $1,000. Typically, one point will lower the interest rate .25% to .375%, depending on the type of loan.
- Does it make sense for your clients to consider purchasing discount points? That depends on a number of factors. Usually, it is best to avoid discount points if a client will be in the home less than four years, is applying for an adjustable rate mortgage or plans to refinance within a few years. Discount points are generally a good idea if the homebuyer plans to remain in the home over five years and is not planning on refinancing in the near future.
- When considering discount points, it’s best to conduct a break-even analysis. This is done by calculating the monthly mortgage payment with no points, then subtracting the monthly mortgage payment with points. The difference is the monthly savings. Then divide the cost of the discount points by the savings. The result is the number of months until the homebuyer breaks even.
- Discount points for residential property are tax deductible in the year they are paid. Discount points are available when refinancing, but those are deductible over the life of the loan. It’s best to advise your clients to consult with a tax advisor regarding the details of these deductions.
Discount points info provided by:
Michele Weiss
Loan Consultant
Prospect Mortgage
NMLS# 333457
5470 Kietzke Lane, Ste. 210
Reno, NV 89511
Cell: (775) 338-6194
Toll Free: (866) 331-0157
Michele.Weiss@prospectmtg.com
Martin
Did you see where the bipartisan deficit reduction panel presented its proposal yesterday that calls for the elimination of the mortgage interest deduction?
Can’t wait to hear the howl from the NAR and National Association of Homebuilders over that one.
Reno Ignoramus
If this nation is serious about reducing its deficit spending, and I am not yet sure that it is, then many sacred cows must be put on the table, including the mortgage interest deduction that costs the Treasury hundreds of millions of dollars a year. Yes the NAR will howl loudly along with a consortium of interests who benefit from the mortgage interest deduction. But then everybody in every industry whose ox is up for gorging will howl. There will be more howling coming out of Washington DC than a pack of coyotes in the cold Nevada night. As in, balance the books on somebody else’s back.
The next few years will determine if this country has the political will to make the very difficult choices it must to keep our ship from sinking.
skeptical
My prediction? More QE until the cows come home. Ultimately, we will have a funding crisis (nobody will want our dollars or debt anymore), and then the jig will be up. Only then will we see the political courage to make real, structural changes. Trouble is, the sh!t will have truly hit the fan by then. FWIW.
Raymond
RI, I agree with your comment entirely. However, I would point out that the mortgage interest deduction costs the Treasury more than $100 billion (with a b)a year. It is expected to cost the Treasury about $640 billion (with a b) over the next 5 years.
I note that the bipartisan commission also recommends eliminating the deduction for real estate taxes as well. The combined deductions for mortgage interest and real estate taxes will cost the Treasury almost $ 1 trillion over the next 5 years.
There was a time, not so long ago, when these deductions were sacrosanct. No longer. Influential Representatives and Senators from both sides of the aisle are more and more talking about their elimination. They will not likely be eliminated at once, but rather phased out. I would not be at all surprised to see the phase out commenced within 2-3 years and to see these deductions completely gone in 5-7 years.
MikeZ
No need to single out the NAR, there’s howling from from the left to the right (even the Tea Partiers) and in-between. It seems that a lot of people SAY they want fiscal discipline but when it’s put-up-or-shut-up time, suddenly no one wants to sacrifice anything to achieve it.
http://www.nytimes.com/2010/11/12/us/politics/12fiscal.html
“Deficit Reduction Plan Draws Scorn From Left and Right”
bob_c
With the median at current levels..the standard deduction isnt that
much less for a married couple.
Crawford
There is merit to all the above comments. As RI and MikeZ suggest, I see no real evidence that the country is yet ready to do what it must do to live within its means. As Skeptical suggests, the country may not ever take the necessary steps until such steps are forced upon it by the rest of the world.
Noteworthy is the observation of how President Obama was totally rebuffed at the recent world financial summit. This is no comment on him personally or the fact he is a democrat and not a republican. The US is rapidly losing its influence on the world financial stage. The American President now has to make speeches telling the world that the USA is still the important country. Fewer and fewer nations are paying attention.
bob_c
just impose a lump sum tax of 40,000K for every us resident
300mil x 40k = 12 trillion
bob_c
and then another 40K per person to bring our industry back to our soil
duhhhh
duhhh…yea….
let’s just impose a flat tax on everybody of $40K……….even people who only earn $30k a year….
frickin’ brilliant…….
bob_c
this is a surcharge tax on top of what you already pay….and you’ve got 90 days
to hand it over—don’t forget 40K for the wife and each kiddie…..and remember,
this will become the means for further defecits AND those that have net worth >2 million are exempt because they are financing the jobs our country has held on to
horny borrower asks
Pics pics we need pics. BTW is Michelle Hot?
Carlin
If the deficit reduction plan is drawing fire from both republicans and democrats, then it probably is worth considering.
CommercialLender
Raymond,
The problem with our entire economic mess lies in your false statement “…costs the Treasury”. It is the PEOPLES’ friggin’ money, not the damn government’s. So very many on the left, and nearly all in the government, forget this simple yet profound fact. Their solution: tax the people more. The peoples’ solution: quit over-spending our money. The rest of the world’s solution: move on without the US.
How sad we’ve been frogs in a frying pan for all these years, and now some even consider our money as belonging to the US Treasury.
CL's Vanishing Credibility
CL,
Usually you are a source of knowledge and insight, but here you must be corrected:
1) “so many on the left…..”
– George W Bush and his Republican congress increased our debt and deficits more than any other President and congress in the history of the United States. Didn’t know they were such lefties.
– Clinton and Carter increased the debt and deficits less than any other President since Kennedy. Still, they are referred to as leftists. So, who exactly are you talking about? The profligate Republicans? I guess we agree, then.
2) “It is the PEOPLES’ friggin’ money, not the damn government’s….”
– actually, it’s none of the above. While the PEOPLE get twice the government they pay for in taxes (due to deficit spending), the Federal Reserve prints the value of our currency into oblivion to fill the gap. While you benefit with more defense, more roads, more unemployed getting $$, etc….. you pay precious little taxes. Just look at your most recent tax returns. Every American pays less in taxes now than he has since the “leftist”, budget balancer — Bill Clinton.
This won’t end well. But I get sick of well fed, BMW-driving, flat pannel TV watching old guys complaining about the lefties that are running the country into the ground.
Most of the politicians are corrupt and destroying our country. They are doing so because they are bought and paid for by the corporations. The argument should not be framed in terms of left and right. That is what FOX news wants you to do because it helps their ratings and bottom line.
The argument should be framed in terms of corrupt vs. honest. It should be framed in terms of corporations vs. individuals. It should be framed in terms of integrity vs. self-centered cheaters who willingly destroy their country for their own personal gain.
Think for yourself instead of parroting the mindless tripe that is fed to you by the rich, fat, conservative media, who really don’t give a care about you, me, or anybody but themselves.
CommercialLender
CLVC,
You mistake me for a Bush 41/43 supporter, or for that matter a ‘republican’. It should be obvious that I’m a plain-ol’ conservative. The R party left me very long ago. I also don’t drive a BMW, nor do I own a flat screen, nor am I old (yet)! I still have the same 19″ TV/VCR combo I had ~12 yrs ago. Unlike 2000’s era Republicans or any era Democrat, I’m fiscally conservative. Oh, and to credit Clinton with the balancing of the budget instead of the Newt-controlled congress is obfuscatory at best and certainly disingenous. Clinton played along only after he got significantly beaten in the first mid-terms, and because he played along, he deservedly won his 2nd term. History recorded that as a good move. Obama should take notes on this last sentence, but I fear he’s too ideologically hardnosed to do so.
You get no agreement from me whatsoever when you refute my statement “It is the PEOPLES’ friggin’ money, not the damn government’s….” It is not the right of the government to confiscate ever-increasing shares of taxpayers’ income any more than it is their right to confiscate any more of the citizens’ liberties as they have. It ought to be, but seemingly is not, illegal to spend taxpayers’ money on pet projects to win votes, including the labor-union boondoggle Stimulus and $800 military hammers alike. So we likely agree on more than you think.
Finally, I just love the oxymoronic hypocrisy in your statement “think for yourself instead of parroting the mindless tripe that is fed to you by the rich, fat, conservative media, who really don’t give a care about you, me, or anybody but themselves.” Your 2nd half of the sentence is the very parroted and mindless tripe you’ve acused me of in the first.
At any rate, great chat. Back to real estate…
MVC/RRBVIP
CL,
Everyone knows that intelligence and open-mindedness are the exclusive domains of those on the left. Anyone who does not think the same as they do is therefore, by definition, less intelligent and closed-minded. Once you accept this and change your beliefs to adhere to the leftist agenda, you too can be intelligent and open-minded. I know it seems paradoxical that we must conform without question to a specific set of beliefs in order to be intelligent and open-minded, but trust them – they know better than we do.
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