Question by Claudio F: Does it make sense to buy mortgage points by refinancing?
I know that points reduce the interest rate and they can be deducted during the life of the mortgage, but does it really make sense financially to buy mortgage points or do they cost more than the benefit they offer?
Answer by Skywalking
I dont see why paying 1 point to lower the interest rate 1/8% makes sense. People say its worth it when you stay long enough to meet the break even point; where the amount of interest saved equals the amount in points you spent. Sure its logical to spend as many points as you can if you plan to stay there for a long time. But, there’s a reason why you shouldn’t pay any points at all; inflation. With a fixed mortgage rate, you will be paying less and less interest each month. And since your payment stays the same, inflation will actually take more of the value of your payments away. So essentially as the interest due is lowering, the value of the interest is also decreasing. Now, if you pay 2 points upfront, you will be foregoing a lot of its present value. Due to inflation that 2 points will be worth less in the future. The money you have in hand today is worth a lot more than it will be in any future period. That’s why banks offer you that option, cause they could have more valuable money to invest with. You would make more money if you let it sit in your savings account. It only somewhat makes sense if you stay the life of the loan.
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