If you don’t know what discount points are, you should definitely get an education while you are still in the planning and saving stages of your FHA mortgage. For new purchase loans including FHA One-Time Close construction mortgages, FHA Condo loans, or FHA Mobile Home loans, discount points may help you save money upfront on your mortgage over the lifetime of the loan.
Discount points aren’t for everyone–some borrowers have a priority of reducing their up front costs and these FHA loan applicants won’t be interested in points as they represent a larger up front and out-of-pocket expense. But for those who want to pay more up front so they can save money down the line should consider points.
What are these home loan discount points? The financial website Investopedia.com defines them as a prepaid interest payment “that borrowers can choose to pay so as to lower the interest on future payments.” Borrowers negotiate the purchase of these points with the lender.
Paid Up Front Or Financed
Points can be paid up front by the borrower or they can be financed into the loan. The ability to finance discount points is dependent in part on the loan and in part on the lender.
The Consumer Financial Protection Bureau official site describes the purchase of discount points as a trade-off between the borrower’s upfront loan expenses and the borrower’s anticipated monthly payment. “By paying points, you pay more upfront, but you receive a lower interest rate and therefore pay less over time.”
If you decide to buy discount points, you’ll need to decide how much you’re willing to set aside for points upfront when budgeting for your loan in addition to the other expenses you must pay (including the down payment).
When Discount Points Make Sense
Basically the longer you pay on the mortgage, the more it makes sense to have bought the points. Discount points are a tool you use to save money across the entire term of the loan; it’s a cumulative effect.
Some who buy discount points may be motivated to do so to obtain any tax breaks that might be available in the year the points are purchased. Much depends on the current year’s tax regulations published by the IRS as well as the way you file your taxes.
Were you planning on taking a standard deduction? Borrowers who do generally cannot deduct mortgage loan interest or discount points; you must itemize these deductions using Schedule A on IRS Form 1040. Depending on the type of transaction you may be entitled to a 100% deduction, but refinances may not be included in this.
This article is NOT presented as tax advice. Those with questions about the tax implications of an FHA home loan and/or buying discount points you should consult a tax professional. But this SHOULD be considered as food for thought about your options and the long term plans you have for buying a home.
Points make sense if you know whether you’re going to sell or refinance your home at some point early or even mid-way through the mortgage. If you do not, it may be wise to consider points once you have a better idea of your needs and goals for the property.
Want More Information About One-Time Close Loans?
One-Time Close Loans are available for FHA, VA and USDA Mortgages. These loans also go by the following names: 1 X Close, Single-Close Loan or OTC Loan.
We have done extensive research on the FHA (Federal Housing Administration), the VA (Department of Veterans Affairs) and the USDA (United States Department of Agriculture) One-Time Close Construction loan programs.
We have spoken directly to licensed lenders that originate these residential loan types in most states and each company has supplied us the guidelines for their products. We can connect you with mortgage loan officers who work for lenders that know the product well and have consistently provided quality service. If you are interested in being contacted by a licensed lender in your area, please send responses to the questions below. All information is treated confidentially.
FHANewsblog.com provides information and connects consumers to qualified One-Time Close lenders in an effort to raise awareness about this loan product and to help consumers receive higher quality service. We are not paid for endorsing or recommending the lenders or loan originators and do not otherwise benefit from doing so. Consumers should shop for mortgage services and compare their options before agreeing to proceed.
Please note that investor guidelines for the FHA, VA and USDA One-Time Close Construction Program only allow
s for single family dwellings (1 unit) – and NOT for multi-family units (no duplexes, triplexes or fourplexes). In addition, the following homes/building styles are not allowed under these programs: Kit Homes, Barndominiums, Log Cabin Homes, Shipping Container Homes, Stilt Homes, Solar (only) or Wind Powered (only) Homes.
Your email to email@example.com authorizes FHAnewsblog.com to share your personal information with a mortgage lender licensed in your area to contact you.
- Send your first and last name, e-mail address, and contact telephone number.
- Tell us the city and state of the proposed property.
- Tell us your and/or the Co-borrower’s credit profile: Excellent – (680+), Good – (640-679), Fair – (620-639) or Poor- (Below 620). 620 is the minimum qualifying credit score for this product.
- Are you or your spouse (Co-borrower) eligible veterans? If either of you are eligible veterans, down payments as low as $0 may be available up to the maximum amount your debt-to-income ratio VA will allow – there are no maximum loan amounts as per VA guidelines. Most lenders will go up to $750,000 and review higher loan amounts on a case by case basis. If not, the FHA down payment is 3.5% up to the maximum FHA lending limit for your county.