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Some relevant questions are here:

What are points on a mortgage?

Should I pay points on my mortgage?

First Time Home Buyers - Down Payment, PMI and Points

I am aware that most people look at the break even point and the time they intend to keep the loan to decide whether to pay points or not. This method usually assumes a constant down payment. As an example, a $250,000.00 home would be compared like this (assume for now constant closing costs besides points):

Down       Points   Rate   Upfront
50,000     1.0      3.875  52K
50,000     0.0      4.000  50K

In this case we would like to know when we recover the money spent on points (the break even point).

Isn't a better way to look at this is to compare the following?

Down          Points   Rate   Upfront
47,979.80     1.0      3.875  50K
50K           0.0      4.000  50K

When I look at my actual numbers (not those shown here) it seems like it is always worth to pay points. Is this a correct way of thinking?

Update: Using Jesse's numbers below we have the following:

Down          Points   Rate   Upfront  Mnth.Pymnt. Total Cost
47,979.80     1.0      3.875  50K      949.97      $391,989
50K           0.0      4.000  50K      954.83      $393,738

Classic break even analysis would go something like this. We save $4.86 every month. To make up for the point ($2,020.00) then I would need to keep this loan for 416 months, longer that the term of the loan. I argue that the total cost of the home with the point is lower than without it as can be seen in the last column of the table. How do we reconcile these two calculations? Please assume that all the costs involved are the point, principal (including down payment), and the interest charged (so no mortgage insurance at this point).

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LasEspuelas
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2 Answers2

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It depends on how long you plan to stay in the house. If you end up having a few kids and need to buy a larger house in five years, you may not have recouped your expense from buying points in that short time frame.

If you are buying a house and have full intention of staying there throughout the life of the loan, then it would almost always make sense to buy points.

Just look at your break even point and ask yourself if you really think you'll still be in the house at the break even point.

When I bought my house I used your "second method," keeping the upfront costs constant. I agreed that made more sense and I ended up buying one point.

Jesse
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Look at it this way, a point is $2000 on the $200K loan. But, it also buys you a lower rate, resulting in a lower payment. Take the lower payment difference and divide into $2000 to get the months it will take to break even.

To make matters more complex, you can account for the after tax effect of all number involved.

The number of months you find is the break even is how long you must hold the mortgage for the points to have been worth paying.

By the way, your numbers show a choice of $954.83 or $940.47 for the two rates. A $14.36 savings and 139 months to break even. Over 11 years? A point usually buys the rate down much more than that. I hope these were made up numbers for sake of discussion.

JoeTaxpayer
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