A couple I know are considering whether to pay mortgage points and this got me thinking. Their loan amount is $540,000. If they put in $10,800 (2% of the loan amount) for the points, then the mortgage rate reduces from 3.5 to 3.125. This saves around $40,000 for a 30 year mortgage. I have read that paying points is not a good idea if one is not planning to live in that house for a long time (I mean even before the amount you pay in points breaks even).
Let's say if they are going to live in that house for 30 years, in that case would paying points still be a good idea. Like my thinking is if I were to invest the $10,800 where the interest rate is a modest 6% (this is modest I suppose, usually its 8 to 10, right?), then the returns are $62000 after 30 years. Given this scenario, paying points doesn't seem to be a good thing. Would be curious to know if my thought process is right here.
(I know I need to consider inflation after 30 years too, but I am unable to see how should I compare the $40,000 (from interest savings) to $62000(investment return) with respect to inflation and which is better in that case. Any ideas?)