Originally Posted by jblack
Is the analysis that simple? PedFed's 30yr rate went down to 6.0% today, purchasing 0.875 points will get you 5.75%.
Well, even PenFed is expecting to make money out of selling points. Other credit unions/banks would expect to make even more money.
But the math is essentially correct in that you have to stay in the home long enough to make up for your initial expense.
A more rigorous opportunity-cost spreadsheet analysis would assume that you could have invested the money that you spent on points. (Perhaps it would compound at 5% after taxes.) Then you could compare that compounding lump-sum curve to the catchup of a curve made of the compounded investing of the monthly savings on your mortgage payment. (Assume it's compounding at the same rate.) The payback in that situation might be more like 20 years or, with PenFed's in-depth sophisticated analysis including interest rates & inflation, 25-35 years.
For example, I spent $15K on a photovoltaic array that's saving $100/month on my electric bills. While the monthly savings pay back the initial $15K in 12.5 years, when I assess the compounded opportunity cost the payback stretches to more like 20 years.
PenFed immediately invests the lump sum you paid for points and hopes that their compounding on your lump sum stays ahead of your compounding on your monthly savings. But they can probably make their money because for every guy like you who pays points and stays put, there are a couple dozen guys who pay points and move before they've made their own paybacks.