This home-buying strategy could come back as mortgage rates rise

Personal Finance

Generally, home buyers need to make a down payment of at least 20 percent of the purchase price in order to avoid the additional monthly cost of private mortgage insurance.

But what if you have enough cash that you’ll need to choose between making a 20 percent down payment or using some of the money to buy points?

“If I put the money into the down payment, I reduce the balance I’m borrowing,” Sonnier said. “If I pay for points, I’ll have a higher balance, but at a lower rate of interest.”

Get out that calculator and compare your monthly savings over the life of the loan. That’s because the additional cost of the private mortgage insurance could cancel out the monthly savings from the points.

Ultimately, whether paying down points makes sense for you will depend on how long you’re staying in the house.

“The rule of thumb is that it takes about five to seven years to break even,” Sonnier said. “If you’re sure you won’t be in that house for five years, then it doesn’t make sense to pay down the points.”

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