Some relevant questions are here:
What are points on a mortgage?
Should I pay points on my mortgage?
First Time Home Buyers - Down Payment, PMI and Points
I am aware that most people look at the break even point and the time they intend to keep the loan to decide whether to pay points or not. This method usually assumes a constant down payment. As an example, a $250,000.00 home would be compared like this (assume for now constant closing costs besides points):
Down Points Rate Upfront 50,000 1.0 3.875 52K 50,000 0.0 4.000 50K
In this case we would like to know when we recover the money spent on points (the break even point).
Isn't a better way to look at this is to compare the following?
Down Points Rate Upfront 47,979.80 1.0 3.875 50K 50K 0.0 4.000 50K
When I look at my actual numbers (not those shown here) it seems like it is always worth to pay points. Is this a correct way of thinking?
Update: Using Jesse's numbers below we have the following:
Down Points Rate Upfront Mnth.Pymnt. Total Cost 47,979.80 1.0 3.875 50K 949.97 $391,989 50K 0.0 4.000 50K 954.83 $393,738
Classic break even analysis would go something like this. We save $4.86 every month. To make up for the point ($2,020.00) then I would need to keep this loan for 416 months, longer that the term of the loan. I argue that the total cost of the home with the point is lower than without it as can be seen in the last column of the table. How do we reconcile these two calculations? Please assume that all the costs involved are the point, principal (including down payment), and the interest charged (so no mortgage insurance at this point).