Paying mortgage points on behalf of the buyer

Question: We’re negotiating the sale of our home and are going back and forth with the buyer about paying mortgage points on behalf of the buyer. What do we need to know about paying this fee for the buyer?

Answer: When negotiating a real estate transaction, buyers can request that the seller pay all or some of the mortgage points. Typically equivalent to 1 percent of the total loan amount, points are basically fees charged by the lender. Points must be paid in cash at the time of settlement, and potential homebuyers should be aware that points are directly related to the annual percentage rate. When shopping for a mortgage loan, watch for no-point loans and secure a loan at the lowest interest rate possible. However, keep in mind that buyers can also deduct mortgage points from their tax return, whether the seller has paid for them or not.

Sellers also stand to benefit from covering mortgage points for the buyer since it reduces their capital gain. In other instances, sellers who've occupied the home for at least two years may not need to reduce their capital gain, especially if profit from the home sale doesn't exceed the statutory dollar amounts of $250,000 or $500,000. However, buyers and sellers who plan to deduct mortgage points should be careful to delineate on the settlement sheet, what figures cover points and loan origination fees. These figures must be calculated as a percentage of the stated principal amount of the loan, and the amount of points charged must correspond to similar mortgage loans in the immediate area. Finally, the loan must be secured by the principal residence and points paid directly by the taxpayer. Be sure to consult your own tax consultant to determine how this information applies to your situation. Ó2008 Information.Inc.