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I am currently in the process of refinancing my home, but I'm not sure how long I want to keep it.

Today the mortgage company sent me the terms, and asked how many points or credits I would like to put into the refinance loan. They said the more points I pay for the lower the interest they will charge, the more credits I take (money they give me to cover the closing cost) the higher the interest.

I'm wondering if I plan to sell the house in 2-3 years would it be better to take out the credits knowing I won't be paying interest for long, or do the credits actually increase the amount I owe the bank meaning I would just break even in the end?

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    Points are basically prepaid interest, they typically only make sense for long-term ownership. – Hart CO Jul 7 '20 at 20:10
  • @HartCO So buying points doesn't actually lower the amount of money I owe the bank? – YAHsaves Jul 7 '20 at 20:11
  • Why are you refinancing? Is it to get a lower rate? Paying off principal to get a lower monthly payment? Taking a larger loan to get cash out? – yoozer8 Jul 7 '20 at 20:12
  • Well, you owe them interest each month, so cutting the interest rate does lower the amount of money you owe them. There are probably some decent calculators to help, you need to know how much they are charging you for how much interest reduction to be able to calculate benefit based on your expected timeline. – Hart CO Jul 7 '20 at 20:14
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    @yoozer8 It's actually family related reasons why I'm doing the refi. Basically I need to get someones name off the deed and doing a refi is the cleanest way of doing that. – YAHsaves Jul 7 '20 at 20:16
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When you pay points you are pre-paying interest on the loan at closing in exchange for a lower interest rate applied over the term of the loan. If you keep the loan for the full term (or at least a long time) you can wind up ahead, but normally it isn't worth it.

In short: It doesn't increase the balance of the loan, it increases your closing costs. The money is better spent on a bigger down payment.

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Credits (more commonly called points) are prepaid interest. You pay money upfront in order to get a lower interest rate on your loan. You can either pay for the points upfront (increasing closing costs) or you might be able to increase the amount you borrow to compensate (effectively borrowing the money for the points).

The payback period, or the amount of time before your interest savings catch up to the higher upfront costs, is typically about 5 years. So it probably does NOT make sense to buy credits if you plan to sell in the next few years.

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