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Real estate agents and mortgage lenders often throw around the word "points" when negotiating your closing and discussing loans.
Points are fees charged by mortgage lenders. Points are paid up-front and are considered interest. Points are a percentage of the mortgage. One point equals one percent of the amount you are borrowing. For example, if a lender charges one point for a $100,000 loan, one point would equal $1000, which you would pay at closing. Like your monthly interest payments, you can deduct the points your pay at closing from your income tax. You can only take this deduction the year you buy your home.
Points are used to "buy down" or lower your loan's interest rate. Spending money up-front to lower your interest rate is a good idea only if hold on to the property for a long time and do
not refinance
your mortgage
. The longer you intend to keep the loan, the more you will gain by reducing your interest rate by paying points up-front. Savy real estate agents will often include points in the process of negotiating your price. Ask your real estate agent about requesting the seller to buy down your points. Having the seller pay the points decreases the amount of cash you will need at closing while lowering your interest rate at the same time.
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