How do I know if makes sense to pay extra points?  Is there a calculator anyone can suggest?

My loan options:
1) 4.75 - 4k fees, 0 points
2) 4.50 - 4k fees, .5 point
3) 4.375 - 4k fees, 1.25 points
4) 4.75 - 4k fees, 0 point (roll all costs into loan)
5) 4.50 - 4k fees, .5 points (roll all costs into loan)
6) 4.375 - 4k fees, 1.25 points (roll all costs into loan)

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Goals: 1) Lower monthly payments, 2) reduce total cost of loan
Mortgage: 30yr fixed at 5.875%.  Owe $288k.  Mo payment: $1820. 
LTV: 70%
Credit: High-700s
Location: NJ
Plan: Stay in the house 5 years (best guess)

Hi David,

Obviously it makes sense to do something as you are dropping a minimum of 1.125% on the loan even if you take the 4.75% option. That being said the comparison comes in between points paid vs. further discount to the rate. Here goes -

@ 288k, paying .50 points you drop .25% in interest rate (from 4.75 to 4.50), it's going to take a hair over 2 years to recoup this additional cost. You are paying $1440 to save around $720 to start. Your interest savings will diminish slightly as you pay your balance down, but either way, if you are planning on 5 years, you're better off with option 2 vs. option 1.

It makes no sense to take option 3, as you are adding an additional .75% in discount to drop only an additional .125 in rate. This is going to take more than 5 years to recoup, so it's beyond your timeframe, I wouldn't bother with this option.

As for paying the costs, or rolling them in, thats more a matter of preference. If you roll them in, you will be paying interest on that money, but the interest on 4k is only about $15 a month. If you have the money laying around and don't need it for a cushion (ie - you have plenty of other assets) pay the money at closing, otherwise roll them in. It should directly change your refi either way.

Looks like, in your situation, option 2 (or 5 if you want to roll them in) is the best route for you, given your situation.

AC

Thanks for the analysis, AC.  I would prefer to conserve cash so I was leaning towards #5 and this helps. 

I thought 1 point bought you .25% off and that's how it goes?  I see that in this case .5points is getting .25% off... that is a huge difference... does what points get you just change from lender to lender?

There is no set standard in regard to how much of a discount in rate 1 point will net you. Just depends on how the rate sheet looks that day, it fluctuates.

-steve