Paying points on a mortgage

Dear Dr. Don,

Dear Barbara,
Sure, you can get a loan that doesn't charge points as part of the money due at closing.

Points come in two flavors, discount and origination. Discount points represent prepaid interest that the borrower pays the lender at closing. Borrowers can lower the effective interest rate by paying discount points. Origination points are a type of closing cost that is charged by the lender.

Most home buyers try to avoid origination points, but may end up paying a higher interest rate on their loan. One way or another, the originating lender is compensated for the work they do in originating your loan.

Paying discount points reduces the interest rate used to calculate your monthly mortgage payment. An important consideration in this analysis is how long you expect to be in the home. The less time you expect to hold the mortgage, the less sense it makes to pay discount points. One point is 1 percent of the loan amount. A point on a $100,000 loan is $1,000.

Bankrate's Mortgage Advisers has an interactive worksheet that answers the question, "Which rate/points combination is best for you?" that will help you decide whether paying points is right for you.

Finding a nothing-down mortgage for $330,000 is a tougher nut to crack. It's the combination of zero down and zero points that is going to be difficult to find. You should work with a mortgage broker to see if that product is available in your area. I recommend an upfront mortgage broker as described by Jack Guttentag in a Bankrate feature.

-- Posted: July 20, 2004