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Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

When do you pay points?

Dear Dollar Diva,
I know that points can be used to lower interest rates. What else should I know about them? Is a real estate agent's commission included in these points?

Points are finance charges that are paid upfront. Each point is equal to one percent of the loan amount; i.e. on a $100,000 mortgage, one point will cost you $1,000; two points, $2,000. Points are tax-deductible. They are also negotiable: to close a deal you can sometimes get the lender to waive them or the seller to pay them.

Points come in two flavors: (1) Discount or prepaid interest: The more you pay upfront in points, the lower your interest rate. (2) Origination fee: Paid for the privilege of getting a mortgage. It often includes a sales commission, but not the real estate agent's; he gets his from listing or selling a home, not from the mortgage.

Should I pay points?
When should you pay points, and when should you not? Here's a rule of thumb: consider paying points if you plan on owning your home, and keeping your mortgage for a very long time; do not if you only expect to own your home for a couple of years.

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The Diva offers this quick-and-dirty calculation to compare a mortgage with points against a mortgage without points:

Divide the number of points by the number of years you expect to hold the mortgage. Add the resulting fraction to the interest rate of the loan with the points. Compare against mortgage with no points.

Points are not refundable, and that's a big negative. You're laying out a lot of front money, and will not get a pro-rata refund if you decide to move or refinance before the loan term is over. Even worse, if you're scratching to put 20 percent down on your new home, the points could put you on the wrong side of the equation, and cost you a bundle for private mortgage insurance.

Before you go shopping for a mortgage make sure you read "Dollar Diva's 10 tips for mortgage shoppers." It could save you some money.

-- Posted: April 19, 2001

-- Posted: April 19, 2001

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