Mortgages: Points vs. higher down payment

Factual Questions
1

So, you’re buying a home. You lay out your down payment, and then you can choose to also pay “points.” Now, these points (each point being 1% of your loan amount…yes?) increase your up-front costs, but decrease your interest rate (and therefore your monthly payment and the total amount you’ll eventually pay back over the life of the loan).

What is the diff. between paying, say, 1 point vs. just increasing your down payment by 1% (of the loan amt.)? You would decrease the total amount owed (and therefore your monthly payment and the total amount you’ll eventually pay back over the life of the loan). Is the diff. in that you can get lower interest rates with points than without?

2

IANA Accountant, but points are tax deductible and down payments are not.

BE careful that they are points and not a loan fee. these are ot deductible.

As for the financial outcome, you have to crunch the numbers to see which works out better financially. Points now for a low rate will generally work out in the long run.

You are going to need to get on Excel and take a look at this over time.

3

Remember, “points” are paid to the lender, in exchange for a lower interest rate.

The “down payment” is really just extra dollars that you pay to the Seller, which decrease the amount you need to borrow from the bank to pay the Seller.

So lets buy a $200,000 house at 10% interest (30 year loan), with a 20% “downpayment” (that is, you need to come up with 20% of the purchase price in cash).

Cash down payment = $40,000
Loan amount = $160,000
Monthly payment (10% interest + principal) = $1,404.11

OK, let’s buy the same house, but pay the bank a “point” (i.e., $1,600) to buy down the interest rate by, let’s say 0.5%.

Cash down payment = $40,000
Loan amount = $160,000
“point” = $1,600
Monthly payment (9.5% interest + principle) = $1,345.37
Net Result – you’ve paid $1,600 to save $58.63 per month. (So, over 27 months or so (2 years, 3 months), you’ll recoup that money).

Now let’s try again, but add the $1,600 to the “downpayment”, instead of paying a point.
Cash down payment = $41,600
Loan amount = $158,400
Monthly payment (10% interest + principle) = $1,390.07
Net Result – you’ve paid $1,600 to save $13.92 per month. (So, over 115 months or so (9 years 7 months), you’ll recoup that money).

It’s all complicated by the fact that mortgage interest is tax deductible, the opportunity cost of the $1,600, etc., but, in this case, I guess I’d pay the point.
(Remember, consult with your broker, tax advisor, lawyer, father-in-law, etc., and run your own numbers!)