is it worth it to pre-pay interest on a mortgage?

Question

we have the option of spending 5k to buy down points on our new mortgage. It would only save us 46.50 a month, but would save over 27k in interest over 30 years.

Answer 1

It will take you roughly 107 months (almost 9 years) to recover that $5000 even without considering the time cost of money. So how likely is it that you'll keep that loan for 9 years? The average mortgage loan is retired, through sale or refi, much sooner.

Answer 2

Actually it really depends on the interest rate you are paying and if $27K over 30 years is valuable to you. According to your financial situation you will have to look at how well you are diversified in your other investments (and your home is an investment). If paying down on the house makes sense and give you a sense of security why not, especially if you interest is high or if your other investments do not yield as much as the rate you pay on the house. A better thing would be thought to pay down the principal of the house instead of the interest itself. The principal is yours to keep as it builds equity in your home. The day you sale the house (assuming you sale for more than what you paid for) the profit is yours and your $5K prinicpal payment will be yours + profit on it.

Answer 3

NO NO NO.

You will not be in the house for 30 years. The average breakeven point for "points" is 8 years. This means that you spend 5,000 up front to save 47 a month. You actually don't start to save any month for amost 9 years.

Answer 4

Don't do it. If rates drop and you decide to refinance the mortgage, you've just blown $5,000 out the window. You are far better off to make more than your minimum payment on a conventional mortgage, thus shortening the term of the mortgage and saving interest in the process.

Answer 5

You won't stay in the house 30 years, trust me. Don't spend the money, as you can see $47 a month savings? You could spend that in your sleep.