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Dear Dr. Don,
Do you have a calculator that enables me to compare the advantages
and disadvantages of the fees and interest rates for mortgages from various firms? In other words, to help me determine
whether to pay fees now to get a lower interest rate.
-- Roger Rates
Dear Roger,
There are two types of points paid at closing on a mortgage: discount and origination points.
Mortgage origination points cover closing costs. They don't have anything to do with getting a lower
interest rate on your mortgage.
Discount points are prepaid interest on the loan. They do lower the rate used in calculating the mortgage
payment, but they are an interest expense that adds to the annual percentage rate of the loan.
Some closing costs are also used in calculating the APR, but not the actual mortgage payment.
As defined in the Bankrate glossary, a point equals 1 percent of a mortgage or other loan. One point on a
$100,000 loan is equal to $1,000. In general, it only makes sense to pay discount points if you plan on being in the house,
and the loan, for a long time.
Bankrate's "Mortgage
point adviser" walks you through a decision
process to help you determine if paying points
is right for you. There's also a "Mortgage
points calculator" that lets you compare two
loans -- one with discount points and one without
discount points included in the mortgage.
There are income-tax effects from prepaying interest that you can discuss with your tax professional. Or,
take a look at IRS Publication 936, "Home Mortgage
Interest Deduction," for a detailed explanation.
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