When should I buy points for a mortgage?

[Acesanders]

Is there every a mathematically correct time to pay upfront for points in exchange for a lower mortgage loan rate? I wasn't sure if this is more of a gimmick or if there is validity to points. I'm 31 and first time home buyer and bought a house with enough bedrooms to sustain my family for the next couple decades or more. The home mortgsge loan will be $235k at 4.125% as of today - this is for a 30 year fixed with 20% down. If anyone can offer me advice or breakdown the mathematical advantages (or not) to buying points, please post below.

[bigdaddybus]

In your example ($235K at 4.125%) each point you buy will cost $2350 and save you .25% off the interst rate of the loan.

So if you buy 3 points ($2350*3)for $7050 it will lower your interest to 3.375%.

You just have to jump on one of the online mortage comparison calculators like the one below and figure out how many months you have to stay in the home to save $7050 (likely over 6 years)

http://www.bankrate.com/calculators/home-equity/compare-loans-calculator.aspx

There is no magic formula, only you know if you really plan to stay in the home long enough to make it worth it to you. Is there a chance you will move for work? Move to get closer to better schools? All that plays into it. I personally have never bought points as I think I do better investing my savings rather than buying down my interest rate.

A few things I have been told over the years.
1. Dont finance points, pay cash or dont do it
2. If you dont have at least 20% down, dont buy points.

Now is a great time to buy a home, my first mortage was "at a great rate" (at the time) of 7.75% for a 30 yr fixed.

[Acesanders]

There is no magic formula, only you know if you really plan to stay in the home long enough to make it worth it to you. Is there a chance you will move for work? Move to get closer to better schools? All that plays into it. I personally have never bought points as I think I do better investing my savings rather than buying down my interest rate..

We plan to stay here for decades. We found a house within budget that has one of the best elementary schools in the county.

Your point about investing is something else that I also thought about. (Plus tax deductions of a mortgage)? What rate of return would I need to outperform buying points? Just .125+% annual rate of return??

Thanks!

[dczech09]

One discount point costs 1% of the mortgage amount and can reduce the effective interest rate by 0.25%. Generally speaking, the maximum allowed is 3 points.

In order to determine whether or not purchasing points makes sense, you need to apply a break-even analysis. What we need to know is how long it would take to earn our money back.

Based on your parameters, one point will cost $2,350 for a 0.25% reduction in your rate.

On your current track...
PV = $235,000
I/Y = 4.125%
N = 360
Pmt = $1,138.93

All you need to do is determine the monthly payment if points are purchased, and find the monthly savings (Pmt listed above - new pmt). The cost of the points divided by the monthly savings gets you your break-even point.

One point costs $2,350. The monthly payment would be $1,105.06. Monthly savings is $33.87. Break-even is 69.38 months.

Two points costs $4,700. The monthly payment would be $1,071.72. Monthly savings is $67.21. Break-even is 69.93 months.

Three points costs $7,050. The monthly payment would be $1,038.93. Monthly savings is $100. Break-even is 70.50 months.

So if you bought 1 point, you would need to stay in the house for 69.38 months (about 5 years and 9 months) in order for the deal to make sense financially.

As you can tell, based on this analysis, the break-even can get slightly longer with each point purchased. Points are a great way to save on interest overall, but it is important to understand where the break-even point is so that you can be sure to get your moneys worth!

[dczech09]

Your point about investing is something else that I also thought about. (Plus tax deductions of a mortgage)? What rate of return would I need to outperform buying points? Just .125+% annual rate of return??

Thanks!

Let's say that you spend $2,350 to purchase 1 point for a 0.25% rate reduction. What rate of return would you need to achieve if you instead invested that money?

Let's look at this from a 30 year perspective. One point would make the mortgage payment $1,105.06. That is a total of $162,821.60 in interest over the life of the loan, versus $175,014.80 normally. So that is a savings of $12,193.20 over the course of 30 years.

A one time investment of $2,350 would have to grow at a rate of about 5.5008% per year in order to equal the $12,193.20 in savings after 30 years.

[Eagle]

Is there every a mathematically correct time to pay upfront for points in exchange for a lower mortgage loan rate? I wasn't sure if this is more of a gimmick or if there is validity to points. I'm 31 and first time home buyer and bought a house with enough bedrooms to sustain my family for the next couple decades or more. The home mortgsge loan will be $235k at 4.125% as of today - this is for a 30 year fixed with 20% down. If anyone can offer me advice or breakdown the mathematical advantages (or not) to buying points, please post below.

Congrats on finding a great new home! And also putting 20% down to avoid PMI. Do you plan on paying off the house early?