new mortgage - buy points or no?

[jblack]

So after a couple of years driving around and researching the local real estate market on the weekends for fun, DW and I have pulled the trigger on moving. We have owned our current house for 6 years but have been looking for a place that has a little more space inside and out, plus better schools. Being able to get the price & terms we required from the sellers made it a no-regrets decision.

Anyways, so now we're presented with the mortgage process and decision around paying for points up front or not. My estimate is that we will stay in this home at least 10 years. It was built last year and has just about everything we could ever want, so unless our jobs require us to move cities (doubtful but possible) we'd stay there for quite awhile.

Does anyone have insights or recommendations in regards to paying points on your new mortgage? We'll have more than 20% down and the monthly payment is not an issue. The simple online calculators I've done show the break-even point around 4 years.

Is the analysis that simple? PedFed's 30yr rate went down to 6.0% today, purchasing 0.875 points will get you 5.75%.

 

[Nords]

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.

 

[jIMOh]

I paid points to get my current 5.75% rate. Paying points does a few things-

1) when it's time to refinance, I always think twice, knowing it cost me more money to close on current loan than normal.
2) if rates drop, the deal has to get really good to even consider refinancing. When rates dropped earlier this spring, they dropped even to my 5.75% rate for 30 yr fixed. They did not get much lower... meaning I know I have a good deal.

I calculate two things:

1) break even point
2) difference in monthly payment

I try to break even in less than 2 years
I want the difference in monthly payment to approach 12% (which saved me one payment per year).

 

[brewer12345]

This gent has great calculators on his site and has impeccable credentials: Mortgage Points Calculator: Rate of Return on Fixed-Rate Mortgages

 

[MileKing]

This gent has great calculators on his site and has impeccable credentials: Mortgage Points Calculator: Rate of Return on Fixed-Rate Mortgages

I second the Mortgage Professor's site. It is an excellent site with very useful information for anyone buying a home or considering a mortgage. The calculators provide a wide variety of options so you can view a number of different mortgage situations (points or no points, Fixed or ARM, interest rate assumptions, etc.) and identify what makes sense for you.