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So I just looked up the requirements for paying points on a mortgage and being allowed to deduct them. It looks like we meet all of them. I'm having a dilemma. Currently I am qualified for a VA loan. No PMI. I can pay $5k in points and save $43/month.
We plan to be in this house forever. I estimate in 10 years time is how long it takes me to recoup the $5k... BUT if I can claim the $5k on my taxes, would that add any extra benefit/bonus to opting to pay the $5k for the lower interest rate??
We are also financing the VA funding fee. We are putting some money down to essentially pay the funding fee but if we finance the points then we would be going into the house "under water" by $5k. Not really a concern for me as we plan to be in this house forever. But there is a stigma associated with financing more than you paid for the home.
Mortgage broker says the $43/month savings isn't worth it... Looking for other opinions and input too.. I posted a similar question in the mortgage forum but am interested in analyzing this from the perspective of whether the tax benefit would be an added incentive to opt for the points to get the lower interest rate.
Also, from a finance perspective, interested in hearing people's thoughts on going into purchasing a home with such a low rate. My uncle said its a bad idea because we could always refinance later but I don't think so because look how many people try to finance and cannot due to their home not appraising high enough, income changes, etc. IMO I'd rather get the low rate now, especially since if I refinance again later the VA funding fee will be even higher and the VA is the only way for me to avoid paying PMI.
I personally would not prepay an expense with a 10 year payback period. Consider the time value of your money.
I am considering the time value and that's what makes it tough.
Let's say I don't pay points, in order for me to save $5k on the same timeline id have to fork over an additional $43 month to a savings account. So that means in addition to paying the $43/more each month by opting not to pay points id have to spend an EXTRA $43. So in order to save $5k over ten years I'd have to pay $86/month more by opting to not go with points.... Whereas if we opt for points yes it adds $5k to my loan but saves me $43/month.
With the same scenario if I opt to pay points I could still plan to add $43/mo into my expenses by putting $43/mo into savings. Then in 10 years I save $10k (recoup the $5k paid in points plus the $5k I've been putting into savings over 10 years)... Or I could just add the $43/month onto my mortgage payment to pay down principal...
Maybe my thought process is completely off?? I am admittedly not good with numbers and this kind of stuff but I can't see how paying points is bad... I have no intention of doing a refi seeing as my rate is so low and if I did refi I'd either have to pay a high VA funding fee or pay PMI. So if this is going to be my only mortgage (assuming we don't take out 2nd mortgage but even then that'd be separate from this), wouldn't it be better to get the lowest rate possible?
When doing taxes will you be able to deduct more than the standard deduction (~$12k-ish)? If not the answer is simple, prepaying $5k won't help on your taxes a bit.
Otherwise you need to look at the portion over the standard deduction that the $5k would be itemized and take out your marginal tax rate. Let's say it's 28%. So $5k comes off the top which is about $3,600 after the tax deduction. So to prepay it would cost you $3,600 (essentially).
I am considering the time value and that's what makes it tough.
Let's say I don't pay points, in order for me to save $5k on the same timeline id have to fork over an additional $43 month to a savings account. So that means in addition to paying the $43/more each month by opting not to pay points id have to spend an EXTRA $43. So in order to save $5k over ten years I'd have to pay $86/month more by opting to not go with points.... Whereas if we opt for points yes it adds $5k to my loan but saves me $43/month.
You have 5k in hand now. That is worth more than 5k 10 years from now.
Quote:
Originally Posted by Bruins3445
With the same scenario if I opt to pay points I could still plan to add $43/mo into my expenses by putting $43/mo into savings. Then in 10 years I save $10k (recoup the $5k paid in points plus the $5k I've been putting into savings over 10 years)... Or I could just add the $43/month onto my mortgage payment to pay down principal...
Maybe my thought process is completely off?? I am admittedly not good with numbers and this kind of stuff but I can't see how paying points is bad... I have no intention of doing a refi seeing as my rate is so low and if I did refi I'd either have to pay a high VA funding fee or pay PMI. So if this is going to be my only mortgage (assuming we don't take out 2nd mortgage but even then that'd be separate from this), wouldn't it be better to get the lowest rate possible?
Getting the lowest rate possible is fine, but not if the cost is too high. For example, would you pay a fee equivalent to the principal amount of your mortgage in order to get a lower rate? Of course not.
You have 5k in hand now. That is worth more than 5k 10 years from now.
Getting the lowest rate possible is fine, but not if the cost is too high. For example, would you pay a fee equivalent to the principal amount of your mortgage in order to get a lower rate? Of course not.
I don't have the $5k now. Well I do but it's in my emergency fund and therefore I don't want to touch it. If I had the $5k I wouldn't opt to finance the fee. That's what I'm saying. The whole "you'd be better off investing the $5k" doesn't apply to me because in my circumstances I don't have it.
I wouldn't pay an astronomical rate. I'm only considering $5k bcause it offers me short term and long term savings plus a tax deduction.
You do have the 5k now. If you need it in your emergency fund that should be end of discussion. That's more important than buying down a rate.
If yo don't need it then the discussion is where to put it, and the consensus here is there are much better places than points on a loan to save $40/month.
I don't have the $5k now. Well I do but it's in my emergency fund and therefore I don't want to touch it. If I had the $5k I wouldn't opt to finance the fee. That's what I'm saying. The whole "you'd be better off investing the $5k" doesn't apply to me because in my circumstances I don't have it.
I wouldn't pay an astronomical rate. I'm only considering $5k bcause it offers me short term and long term savings plus a tax deduction.
The tax deduction is a wash, so you should ignore it for purposes of making this decision. (The point is deductible, but so is the mortgage interest you would have paid instead).
The long-term savings is not guaranteed. It is going to take 10 years to break even. I understand you plan to stay in your house longer than that, but unplanned changes happen in our lives all the time. If you should sell or refinance before the 10 year mark, you will have lost money.
I'll bet if you run the numbers, you're farther ahead if you applied that $5K to the principal to shorten up the loan duration. $43/month can't possibly be knocking the rate down very much.
We are also financing the VA funding fee. We are putting some money down to essentially pay the funding fee but if we finance the points then we would be going into the house "under water" by $5k. Not really a concern for me as we plan to be in this house forever. But there is a stigma associated with financing more than you paid for the home.
Mortgage broker says the $43/month savings isn't worth it... Looking for other opinions and input too.. I posted a similar question in the mortgage forum but am interested in analyzing this from the perspective of whether the tax benefit would be an added incentive to opt for the points to get the lower interest rate.
Also, from a finance perspective, interested in hearing people's thoughts on going into purchasing a home with such a low rate. My uncle said its a bad idea because we could always refinance later but I don't think so because look how many people try to finance and cannot due to their home not appraising high enough, income changes, etc. IMO I'd rather get the low rate now, especially since if I refinance again later the VA funding fee will be even higher and the VA is the only way for me to avoid paying PMI.
Is 5k 1 point of the loan and how much will the rate drop.
You understand the stigma
If you are financing the $5000, it is money you don't have and can't use for anything else of your choice.
You uncle is right, but maybe 15 year from now you'd have a big chunk of your loan paid down and would like to refinance, by then hopefully appraisal shouldn't be an issue. If you do refinance then you'd have spent $5000 more than if you didn't pay for the points. Most people don't stay in the first house they bought.
Due to the low rates, it is possible you'd never want to refinance and you said you'll own the house forever and if you are getting a tax benefit from the points, I'd do it if I were in your shoes. But I'd talk to a tax professional to see if I can deduct the points if they are being financed , just to understand the total savings.
Is 5k 1 point of the loan and how much will the rate drop.
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