Does it make sense to pay points for a lower rate?

As most Borrow123.com customers know, we offer a spread of rates based on paying some points to rebate points. For example, for one loan scenario for 30 years fixed rate mortgage your options could be 4.75 % with 0.75 points or 5 % with 0 points. On a $400k loan the cost of the point is $3000 up front, the monthly payment difference is $60.69/month. So it takes about 50 months to make up for the cost of the 0.75 point. This is a simple calculation, not factoring the future value of the $60.69 /month stream of payments for the next 50 month or the future value of the up front $3000.

So, the decision to pay the points will be based on how long you intend to stay in the house. The trick is to find some instances where the cost of buying down the rate cost less than normal ranges. By this, I mean sometimes it cost less than my example to buy the rates down. Depending on the market, sometime it cost more than 1/2 point to buy the rate down by 1/8%. Sometimes it cost as little as ¼ points to buy down the rate by 1/8%. If the cost of buying down the rate on the above example was 0.375 point, it would only take 24 month to recoup the up front cost. Of course with purchase transactions, take whatever points the sellers are willing to put into the deal, using the same calculations in your negotiations to see if it works out better for you to take price concession or point contribution from the sellers.

I also get questions about the tax write off on the points that you pay. On a refinance transaction, you have to amortize the points over the life of the loan and on the purchase transaction you get to deduct the whole amount in the year of your purchase. This is my current understanding, however I would check with your accountant before making any decisions.

One important consideration when deciding whether to pay points is what are the chances of refinancing again within a few years? If that was an option, then paying points is less attractive. If you are refinancing to a 15 or 10 year loan it probably make more sense to pay the points for a lower rate since is likely you will make the payments for the life of the loan.