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Should you pay points when refinancing?

Posted by  on Oct 19, 2011
 

When are you going to take advantage of the best mortgage rates in history to refinance your mortgage? Maybe you don't have the best credit score, but believe it's good enough to qualify for refinancing, just not at the lowest mortgage rates. One way to get offered lower refinance rates is to consider paying points.

When you pay points you are prepaying interest on a mortgage, which decreases the mortgage rate you are offered. A point is equal to 1 percent of the total amount of a loan. So for a $200,000 mortgage loan, 1 point would equal $2,000. What you pay for a point is in addition to other closing costs.

Compare mortgage quotes

When you compare mortgage rates from various lenders it is important to make sure you ask about loans that allow you to pay points so you'll be able to adequately assess which package is best. It is most helpful to compare mortgage quotes that have as closely as possible the same terms and conditions.

Can you deduct points for a refinance?

According to the Internal Revenue Service (IRS), any points paid for refinancing are usually deducted over the life of the new mortgage. But if some of the refinanced proceeds are used to improve your home and weren't a charge for any services provided by the mortgage lender as part of the loan origination fee, you may be able to fully deduct the portion of the points that is related to the improvement the year you paid them.

Mortgage points and the IRS

You might not be able to deduct the amount of points paid on an income tax return in the year that you paid them, according to the IRS. If the amount of your acquisition debt exceeds $1 million or your home equity debt exceeds $1 million, you will be unable to deduct all of your mortgage interest and points.

Among the requirements that must be met to deduct the full amount of mortgage points in the year you pay them are the following:

  • You refinance a mortgage for your principal residence
  • The points paid were not for more than is usually charged in your area
  • Points paid did not include items that are usually stated separately on the settlement sheet, such as fees for appraisals, inspections or attorneys
  • The points were calculated as a percentage of the mortgage loan amount

There are other requirements that must be met to deduct the full amount of any points paid, so refer to the IRS website for guidance.

Best mortgage rates ever

America is experiencing the lowest mortgage rates in history. The average for a 30-year fixed-rate mortgage was 3.84 percent on September 27, 2011, according to ShopRate data. Now is the time to refinance if you think you can qualify for a better mortgage deal.

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