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When Should You Pay Points on a Loan?

When Should You Pay Points on a Loan?

When it comes to comparing interest rates for a mortgage loan, homebuyers often have the option of choosing a loan with a lower interest rate by paying points. Simply put, a point is equal to 1 percent of the loan amount. For example, with a $100,000 loan, one point equals $1,000. Points are usually paid out-of-pocket by the buyer at closing.

Paying points may seem attractive, because a lower interest rate means smaller monthly payments. But is paying points always a good idea? The answer generally depends on how long you plan to stay in the house. Let's look at an example:

Bob and Betty Smith are shopping for loan rates on a $150,000 home. Their bank has offered them a 30 year loan at 7.5 percent with no points. This works out to a monthly payment of $1,049.

However, their bank has also offered them a loan at 7 percent if they agree to pay 2 points (or $3,000). At this lower rate, their monthly payment drops to $998, or a savings of $51 per month.

By dividing the amount they paid for the points ($3,000) by the monthly savings ($51), we see that they will have to own the house for 59 months (or just under 5 years) before they will start to see savings as a result of paying points. If Bob and Betty plan to stay in the house for many years, then paying points could make good sense. But if they see themselves moving to another house in the near future, they'd be better off paying the higher interest and no points. (Note: for simplicity, the above example does not take into account the time value of money, which would slightly lengthen the break-even time.)

Can you deduct points on your income taxes?
In the United States, one side benefit of paying points on a mortgage loan is that they are fully tax deductible for the same tax year as your closing. However, this does not apply to points paid for a refinance loan. For refinances, the IRS requires you to spread out the deduction over the life of the loan. For example, if you paid $5,000 in points for a 30-year refinance loan, you can only deduct 1/30 of the $5,000 each year for 30 years. If you pay off the loan early, though, you can deduct the remaining amount that tax year. As to this page and all pages regarding tax situations, please check with your tax professional.

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What is a Condominium or Condo?

Condominiums, or condos, are essentially apartments that are individually owned.

A condominium is a form of home ownership in which individual units of a larger complex are sold, not rented. These units may be renovated apartments, townhouses or even commercial warehouses. Contrary to popular belief, the word 'condominium' does not apply to the type of unit itself, but the legal ownership arrangement. Any multi-unit structure can 'go condominium', meaning occupants must either vacate the premises or purchase their apartments outright.
Those who purchase units in a condominium technically own everything from their walls inward. All of the individual homeowners have shared rights to most common areas, such as the elevators, hallways, pools and club houses. Maintenance of these areas becomes the responsibility of a condominium association. Every owner owns a share of interest in the condominium association, plus an obligation to pay monthly dues or special assessment fees for larger maintenance problems.
A condominium arrangement is not the best option for every potential homeowner. There can be a noticeable lack of privacy in the common areas--the pool must be shared with every other condominium owner, for example. Those who would prefer to own all of their amenities and maintain their own lawn and garden may want to pursue single home ownership options instead of a condominium. It can also be more difficult to sell a condominium unit as opposed to a home with acreage. Condo owners only own their units, not the ground beneath them.

Pros and Cons on Buying a Condo

Condominiums - Pros

  • Condominiums are generally less expensive than single family homes
  • You may be able to afford to live in a more expensive neighborhood
  • Easy lifestyle - the condominium homeowners association often covers roof replacement, exterior maintenance, common area maintenance, and other expenses
  • Good "lock and leave" vacation homes
  • Condominiums often include amenities such as a community pool

Condominiums - Cons
  • Noise from neighbors, including those above and below your unit
  • Homeowners' association fees and politics, and CC&R restrictions
  • Parking at condominiums is often in a common area not attached to the home
  • No yard
  • Some condo buildings may have stairs

Those who may benefit the most from condominium living are veteran apartment renters who don't mind having close neighbors. Others may not want to be bothered with external maintenance or the responsibility of lawn care. The overall price of a condominium townhouse may be much lower than an equivalent single-unit home. Buying a condominium does allow equity to build, unlike paying monthly rent in an apartment complex.
One thing to be aware of when living in a condominium setting is the political reality of an owners' association. Decisions may be made in monthly meetings which will cost individual owners more money, but not necessarily deliver equal benefits for all. It can be nearly impossible to avoid being affected by at least one condo board decision, so active participation in meetings and discussions may be more compulsory than you might expect. Condominium living may be more advantageous financially than apartment rentals, but it does require more active participation in community events.

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Columbus Condos - Columbus is the capital and the largest city of the U.S. state of Ohio. Located near the geographic center of the state, Columbus is the county seat of Franklin County, although parts of the city also extend into Delaware and Fairfield counties.
Delaware Condos - Delaware is a city in the U.S. state of Ohio and the county seat of Delaware County.
Dublin Condos - Dublin is a city in Franklin, Delaware, and Union counties in the U.S. state of Ohio. The population was 31,392 at the 2000 census. In 2007, the population was estimated to be 37,954, and Dublin continues to be one of the fastest-growing suburbs of Columbus.
Gahanna Condos - Gahanna is a city in Franklin County, Ohio, United States. The population was 32,636 at the 2000 census.
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Granville Condos - Granville is a village in Licking County, Ohio, United States, founded by settlers from Granville, Massachusetts, a town of which it now has three times the population.
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Lewis Center Condos - Lewis Center is an unincorporated community in northwestern Orange Township, Delaware County, Ohio, United States, located between Columbus and Delaware.
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