March 15, 2023
If you don’t know what discount points are, you should explore them as an option to lower your mortgage loan interest rate while 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 loan’s lifetime.
Discount points aren’t for everyone–some borrowers prioritize reducing their upfront costs and these FHA loan applicants won’t be interested in points. Why? They represent a larger upfront and out-of-pocket expense.
But for those who want to pay more upfront 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 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 upfront by the borrower or 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 and 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 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 and how 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 should consult a tax professional. But this SHOULD be considered food for thought about your options and your long-term plans for buying a home.
Points make sense if you know whether you will 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.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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