Does it make sense for me to pay the .5 point?  I am guessing I will be in the house for 5-7 years.  I will be rolling all costs into the loan. Thanks.

My options:
1) 4.75 - 4k fees @ 0 points
2) 4.625 - 4k fees @ .5 point

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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 5-7 years (best guess)

David,

In theory, you will recoup your additional .5% in the 4th year of the loan, so if you intend to stay there for 5-7 years, than yes it would make sense. That being said, paying .50% to drop .125% in rate is not normally a good deal. Because, if for some reason you need to refinance or choose to move within the first 4 years it is likely that you have not recouped your cost.

Additionally while you can soundly base a decision on amortizing the .5% over a .125% per year interest savings, the real money effect is going to be longer. Think of it this way, what else could you do with the extra $1500 over a 4 year period? While you may or may not be able to out-earn 4.625%, whatever you can earn (even in an online savings account paying 2%) will lengthen your true breakeven time. If you were paying a half to drop .25% in rate, or paying less than a half, I might say to go for it. In this case, I would not advise paying the additional points on the loan. Hope this helps,

AC

Mr. Latone,

I am a firm believer in not paying points.  The average lenghth of a mortgage in this country is only 4.5 years.  Not to say that you will or will not move during that time but statistics show that for various reasons, a mortgage, on average lasts approx. 4.5 years.  That being said, you would be best served to take the lowest rate available w/ zero points AND zero origination fees.  Standard settlement costs in NJ are approx. $3,100 - $3,200.  I would be more than happy to assist as I reside in New Jersey myself.

Best of luck and maybe we'll chat soon.

Stu Sable:

Mr. Latone,

I am a firm believer in not paying points.  The average lenghth of a mortgage in this country is only 4.5 years.  Not to say that you will or will not move during that time but statistics show that for various reasons, a mortgage, on average lasts approx. 4.5 years.  That being said, you would be best served to take the lowest rate available w/ zero points AND zero origination fees.  Standard settlement costs in NJ are approx. $3,100 - $3,200.  I would be more than happy to assist as I reside in New Jersey myself.

Best of luck and maybe we'll chat soon.

In the past, points didn't make much sense becuase you could not get much in rate for how much they cost (i.e. 0.500% points for 0.125% in rate) and points usually costed about 4-5 years to pay off.  Right now, points are much more attractive for multiple reasons:

1 - You can usually get more for your money.  In the last week or so points have gotten a little more expensive, but in the last couple months I have often seen where you pay 0.125%-0.25% in points to lower the rate by 0.125% and this is often paying off in less than 2 years.

2 - It's true that for a while, the average American kept their loan for 3.5 years, but that was when rates were a little higher and many more people had Adjustable Rate Mortgages.  Now the lowest rates are still on ARM's, but the 30 Year Fixed is at an all time low.  How much lower can they go?  No one really knows, but they are more likely to go up over time than further down.  It may make sense to pay a little points now because you may have this loan for a long time.

That all being said, your mortgage professional should be able to do a spreadsheet where they analyze multiple rate options at different point levels and show how they perform over time and those numbers will help you in your decision.  It all depends on your own plans for your home and how important that lower payment will be.  I used to be very anti-points, but the way that lenders are structuring rates right now (due to prepayment speeds), points are becoming a more viable alternative.

Finally, 0.5% point for an 0.125% in rate does not sound like a good deal in this current market.

Stu Sable:

you would be best served to take the lowest rate available w/ zero points AND zero origination fees.

I believe that it is best to examine each of the options and determine how long it would take to break even.  Once you have these numbers, you can evaluate your options versus your plans and the possible changes to your plans down the road. 

General rules and blanket statements such as the above are not accurate in every situation.

In this rate environment, paying points makes more sense than not paying points (but you should be getting more than .125 for .5 points).    But anyone that makes a blanket statement that one way or another is ALWAYS better is just not doing their job correctly.   Each file should be analyzed on its own, it is very easy to run some amortization tables to see where each scenario will be in the 5 to 7 years.