It all depends on how long you’re going to be in the house. Usually, if you plan on staying four or more years, then points can save you money. To determine how many months until you break even, subtract the payment if you buy down the rate from the payment if you don’t buy it down and divide by 12.
For example, on a $100,000 loan at 6 percent for 30 years, the payment is $599.55. But, if you pay $2,000 and buy the rate down to 5.75 percent, the payment is $583.57, a difference of $15.98 a month. (Incidentally, if you had subtracted the $2,000 and gone with a $98,000 loan instead, the payment would be $587.56, about $3 more.) Dividing the $15.98 monthly savings into the $2,000 point cost shows that it will be about 125 months before you break even and start saving $15.98 a month. This is hardly a barn-burner investment, but if you keep the home for the full 30 years, the savings will add up. However, most financial advisers don’t recommend going beyond 36–48 months to recoup your point costs.
It’s interesting to note that in the above example, if the interest rate were 9 percent, buying the rate down to 8.75 percent would result in a 112-month breakeven. The higher the interest rates goes, the more attractive points become in saving you mortgage interest. The bottom line is that points are usually not a good investment as you can see from the numbers in the above example. However, if points are part of a seller or builder concession, it’s better to take the buy-down than to subtract the concession from the sales price.
For example, on a $100,000 loan at 6 percent for 30 years, the payment is $599.55. But, if you pay $2,000 and buy the rate down to 5.75 percent, the payment is $583.57, a difference of $15.98 a month. (Incidentally, if you had subtracted the $2,000 and gone with a $98,000 loan instead, the payment would be $587.56, about $3 more.) Dividing the $15.98 monthly savings into the $2,000 point cost shows that it will be about 125 months before you break even and start saving $15.98 a month. This is hardly a barn-burner investment, but if you keep the home for the full 30 years, the savings will add up. However, most financial advisers don’t recommend going beyond 36–48 months to recoup your point costs.
It’s interesting to note that in the above example, if the interest rate were 9 percent, buying the rate down to 8.75 percent would result in a 112-month breakeven. The higher the interest rates goes, the more attractive points become in saving you mortgage interest. The bottom line is that points are usually not a good investment as you can see from the numbers in the above example. However, if points are part of a seller or builder concession, it’s better to take the buy-down than to subtract the concession from the sales price.
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