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Puzzling Points
Question: Which offers you the best deal, a low interest rate mortgage with "points" or a higher interest rate loan with no "points"?

Answer: It depends. Consider a 30-year, fixed-rate mortgage for $100,000 at 8 3/4% interest and no points. Monthly principal and interest payments would $787. To qualify for an 8 1/4% loan, you have to pay three points, or $3,000. Payments on this loan would be $751, a savings of $36 per month. How can you determine which loan is best?

First, calculate how long you will have to live in the home in order to recoup the $3,000 that you paid in points. Divide $3,000 by your monthly "savings" of $36, then divide that answer (approximately 83) by 12 months per year for the number of years it will take to recoup the points (approximately 7).

If you are fairly certain you will live in your new home for seven years or more, then the loan with points is the better value. Other factors may influence your decision, however, such as how much cash you have for closing and your monthly budget. Such calculations will give you the data you need to make a decision.

 
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