Is it worth buying down interest rate points on a home loan?

It depends on the size of the mortgage, the points purchased, the reduction in interest rate for each point, and the time you plan on holding the mortgage.

For example, if you have a 30-year fixed mortgage in the amount of $250,000 with an interest rate of 4%, your monthly payment will be $1,193.54.

Let’s say you can find a mortgage with 2 points with an interest rate of 3.5%. That means you’ll pay about $5,000 extra in closing costs. Your new monthly payment is now $1,122.61. (Many mortgage companies will roll the cost of points into the balance. In this case, your new monthly payment is $1,145.06, making your break-even point even farther in the future).

So you’re saving $70.93 a month, or $851.16 per year. It will take you nearly 6 years to break even, i.e., the amount of monthly savings that will add up to $5,000. After that, you have real savings. The length of time you hold the mortgage is key to whether you’ll save overall.

I’ve always avoided points because it’s hard to predict the future. You can use the calculator below to test different scenarios.

Amortization Calculator
Try this interactive amortization calculator to find the amortization schedule for any fixed-rate mortgage. Not available in all states.

Author: Steven James Taylor
Source: Quora

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