Written By: Michael L. Walden
An overlooked decision in homebuying is whether making a higher down payment or paying points to lower the mortgage interest rate is better. This paper outlines the relative costs and benefits of each option and then simulates the options for various mortgage interest rates, lengths of stay, and tax brackets. Internal rates of return are derived as the measure of relative benefit. In typical cases, paying more points to lower the mortgage interest rate is superior to making a larger down payment. KEY WORDS: Homebuying, mortgage loans
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