Is it better to buy down the interest rate on a mortgage by paying
points or use that point money as down payment and pay a higher
rate on a smaller mortgage amount? -- Richard Reduction
I'm not a big fan of buying down an interest rate
on a mortgage by paying points unless you're fairly certain you'll
be in the home long enough to guarantee an economic benefit from paying
Points come in two flavors, discount and origination. Discount points
allow the borrower to prepay interest expense upfront and buy down
the nominal or stated rate on the mortgage loan. The points paid
are, however, considered in calculating the annual percentage rate
(APR) on the loan.
Bankrate's Mortgage Adviser interactive worksheet,
rate/points combination is right for you?, can help you decide
if paying points is the right decision.
I am a veteran and receive compensation entitlement at 100 percent
disabled. I plan to purchase a home with a Federal VA loan. I plan
to live in the home a minimum of 10 years and I am putting 5 percent
down on the home. I am not required to purchase the mortgage insurance
as I am a 100 percent disabled vet. Is it to my advantage to purchase
points on mortgage?
Thank you for your time. I am having a hard time finding
an answer to this question. -- Tommy Twixt
As I told Richard in the above letter, I'm not a big fan of paying
discount points unless the borrower is fairly certain they will
be in the home long enough to capture enough of an economic benefit
to offset the initial outlay for the points.
Because the provisions in the VA loan program that
you cite allows you to buy a home with 5 percent down, with no mortgage
insurance expense because of your disability, points can make more
sense in your situation.
Not having to pay mortgage insurance on a 5 percent
down payment makes your case unique enough that the Bankrate
Mortgage Adviser worksheet can't help you decide. Instead try
Professor's Break-even Calculator to estimate how long you have
to be in your home for it to make sense to pay points.