Is it better to pay points on a mortgage or more of a down payment?

Answer 1

I presume you mean "discount points" which is a way of paying interest in advance, not a magical way of getting a lower rate. A discount point allows the lender to collect interest at closing, rather than over 360 payments. This is an advantage to lenders and a disadvantage to borrowers on mortgages that end up being refinanced.

A larger down payment reduces the amount of money financed, thuslowers monthly payments. It is arguable whether you are better off putting down more than 20-30% of the value of the house. Savvy investors will pay a practical down (say 20% to obtain conventional financing at a good rate) then invest their leftover capital in investments that return substantially more than the interest of their mortgage. In other words, why put an extra $100,000 down on a house to reduce interest payments at 6.5%, when you could invest that same 100,000 at 10 to 20%?

To sum up, paying discount points at closing to obtain a lower rate is kind of a shell game.

Answer 2

Roughly, if you plan on keeping the loan more than seven years, pay points. If you plan on keeping it less than seven years, more down payment.

Answer 3

Points...that will help you in the long term save more money.