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Paying points with a mortgage

Dr. Don TaylorDear Dr. Don,
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

Dear Richard,
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.

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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 the points.

Bankrate's Mortgage Adviser interactive worksheet, Which rate/points combination is right for you?, can help you decide if paying points is the right decision.

Dear Dr. Don,
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

Dear Tommy,
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 the Mortgage Professor's Break-even Calculator to estimate how long you have to be in your home for it to make sense to pay points.

-- Posted: April 1, 2005




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