More on buying down points

Earlier we went through some examples comparing monthly payments using zero point rates and paying some point for a lower rate. To further illustrate the different scenarios of how to get a lower payment, let look at one more example of someone refinancing a mortgage.

Let assume you have an existing mortgage that initially was $417,000.00 at 6.125% fixed for 30 years. Now 1 year later you can refinance this loan with a lower rate and your choices are 0 point at 5%; 4.875% with ½ point; or 4.75% with one point. Your current principal and interest payment should be $2533.73 and your remaining balance should be just under $412,000.00.

With the cost of points rolled into the loan and putting aside all other related cost (closing cost, prepaid items and escrow balances), your monthly payments for the three different rates will be as follows:

$412,000.00 @5% for 30 years = $2211.70
$414,060.00 @4.875% for 30years = $2191.23 (cost of ½ point = $2060)
$416,120.00 @4.75% for 30 years = $2170.67 (cost of 1 point = $4120)

As you can see the payments are lower using the lower rate. The same calculation can be done with the closing cost rolled into the loan also. One consideration of this example is the increase of the loan balance. So is it real saving or is it just deferring the payment to the future?

Using the above example, if you keep the loan for 10 years, the balance of your loan will be correspondingly equal to $279,681, $279,388, and $279,067. The balance is pretty much the same with the lowest balance being the one with the lowest rate.

So if you are planning on staying the house for extended period, 10 years or more, the lower rate will give you the lower payment and amortize the loan faster.