Should I pay points?

To answer this question, determine how much money will remain after you pay the down payment and closing costs. If you have enough left over to cover required bank reserves, as well as sufficient money to live on, you may consider paying points. If your answer is no, then you should NOT think about paying points.

Your next step, if you can afford points, is to perform a break-even analysis, which works like this:

		Calculate the difference in monthly payments for two consecutive interest rates.
		Determine the cost in points of getting the lower interest rate.
		Divide the cost of the points by the difference in the monthly payment to determine the number of months to break even.

You've got a 30-year fixed, $400,000 mortgage

A rate of 6.000% = monthly payment of $2,398.20 A rate of 5.875% = monthly payment of $2,366.15

The difference between these payments is $32.05 per month

The cost in points is 1/2 a point (.5 points), or $2,000

$2,000 divided by $32.05 = 62.4 months

Thus, it takes 5 years and 3 months before you begin to save money by paying 1/2 a point.

If you intend to keep the property and or mortgage for approximately one year more, or longer than the break-even number of months, it makes sense for you to pay points; otherwise, it does not.

Consider too, that there's a difference between purchasing and refinancing when it comes to points. On a purchase, points usually are tax-deductible in the year you pay them; on a refinance, they usually are spread over the life of the loan. Make sure you consult a tax advisor on this matter.

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