We're looking into refinancing from a 30 year mortgage at 5.5% (currently 23 years left) to a 20 year mortgage at 4.5%. Paying points will reduce the rate somewhat, but since we don't have extra money to pay them, the price will be rolled into the mortgage. Is it better to pay the points and reduce the rate?
When you add points, a break-even date comes into play. That date varies depending on the rate and number of points. As an approximate example, having one point at those rates would have a break-even point of about 5 years. At that time, the amount you save with the lower rate makes up for the extra cash you paid for points. After that, you are saving money.
If you don't plan on having the loan that long, the points are not worth it. Also, you need to calculate the break-even date based on your own parameters. I suggest searching for an online calculator or spreadsheet that supports point calculations.
You may also be able to deduct 1/30th of your points every year. Ask you accountant about that.
+1 for creating your own spreadsheet. This is invaluable. For what its worth - when I got NEW mortgage to buy a NEW house, I was able to deduct all of your points in the same year instead of 1/30th of the points every year. I would much rather get the tax benefits the first year instead of only getting 1/30th of it every year (especially because there is a lower threshold at which no tax benefit applies - if itemizing < standard deduction, you have no tax benefit)– CrimsonXFeb 11, 2011 at 13:08
Check out the Mortgage Professor's website, in particular Calculator 11a:
Who This Calculator is For: Borrowers who want to know whether they will save or lose money over a specified period by paying points in order to reduce the interest rate on an FRM.
What This Calculator Does:This calculator shows the costs and benefits of paying points to reduce the rate on an FRM, and the minimum period they must hold an FRM before it makes sense to pay additional points (the "break-even period").
From what I hear, usually not. Get an amortization schedule for the property, and see what the savings on the interest rate is. Then see what the interest versus borrowing less is.
The consider that you can invest the buy down money, or better yet use it as down payment and borrow less money. Typically (as experienced by wife who use to be a loan processor) the buy down did not save any money, and just made the broker a bigger commission.