When should I consider to buy points on a mortgage?

Question

I have a little over 20% for a down payment.

Answer 1

here is a link for a calculator
http://mortgages.interest.com/content/calculators/discount.asp

it depends on how long you want to keep the property.
let's say for $500,000 loan @ 6.5% your interest payment is $2708.. if you want to "buy it down" to 6.00% and pay 1 point.. then, your interest payment @6% would be $2500... and it would cost you $5,000... it means it will take you 5000/(2708-2500)= 24 months to recoup the point.. so, paying this points will make sense if you will keep the loan for 24+ months

Answer 2

I would never buy points on a loan. Nor would I waste the money I have saved to put a downpayment on a house.

You're house is the biggest money maker you have. Put the money somewhere where it will do some good for you. Modest investments are getting around a 7% gain.
Let's say you have 20k to put down. Instead invest it. In 30 years, if you add absolutely nothing to it, at 7% it would be worth $162,000.
Couple that with your 401k and any other investments you have and retirement is looking a lot better.

Answer 3

when you will be in the home for longer than the break even points

Unlike many financial calculations the break even point is pretty easy. Divide the number of points by the rate reduction.

If one point lowers your rate .2% then the break even point is 5 years. If one point lowers the rate .25% then the break even point is 4 years.

I would add a year or two cushion in determining whether to pay points. This is because people are likely to move sooner than they expect and also because there is a possibility that rates will reduced enough where re-financing makes sense.

Answer 4

Always consider it. Its as simple as paying now compared to paying over the term of your loan.

First you'll want to get an idea on how long you are going to be in this house. Ask your broker how much your rate decreases for one point. Figure out how much you would pay from now until you plan to sell or refinance. You'll want to figure this amount twice: based on the rate with points and the one without points.

If the amount you are saving is greater than the amount you have to pay for the points, then go for it.

Check out my mortgage blog if you want to learn about the mortgage decision process: http://explaintome.blogspot.com

Answer 5

I never buy points... the average American buys a new house or changes job too often for points to be a good idea. Only pay points if you know, for sure, you will stay in the house for a long time.