Points- To pay or not to pay- that is the questions

[Anonymous]

I am looking at the process to determine the correct value in whether or not paying 1% makes sence by trying to determine the real breakeven point.

The CU I am looking at has this blurp about whether you should or should not pay points:

"Points are considered a form of interest. Each point is equal to one percent of the loan amount. You pay them, up front, at your loan closing in exchange for a lower interest rate over the life of your loan. This means more money will be required at closing, however, you will have lower monthly payments over the term of your loan.

To determine whether it makes sense for you to pay points, you should compare the cost of the points to the monthly payments savings created by the lower interest rate. Divide the total cost of the points by the savings in each monthly payment. This calculation provides the number of payments you'll make before you actually begin to save money by paying points. If the number of months it will take to recoup the points is longer than you plan on having this mortgage, you should consider the loan program option that doesn't require points to be paid.

If you'd prefer not to make this calculation the "old-fashioned way," we have a points calculator!"

If I just add up the money saved in the lower payment then that is leaving out 2 other important numbers out of the mix. Interest saved, and additional principal paid.

Would the correct number to divide the cost of the points be: Monthly payment money saved + Interest charges saved + additonal principal paid?

Their calculator does not bring the other 2 numbers into the mix- or am I missing something here?

[flan]

The interest saving is the difference in monthly payments.  The loan, regardless of the interest rate, is designed to reduce the balance to zero in 360 monthly payments (assuming, of course, a 30 year fixed mortgage). 

So, if you do nothing else, you'll pay (difference in payments * 360 ) less in interest over the life of the loan.  If you make an additional principal payment, so that your monthly payment is the same both ways, then you'll pay rather less than that (and pay off sooner,).

[Revelate]

Honestly the two salient figures are total cost of the mortgage and the mortgage end date; the longer you keep your mortgage, the more attractive points are (in general).

I'd simply go use one of the plethora of bankrate mortgage calculators as you can do all sorts of options for allocating extra cash, but if you're planning to pay additional money each month it devalues points awfully quickly.

I took a 15 year mortgage anyway figuring either I was selling it or paying it off bloody quickly depending how the next 5ish years go and as such points absolutely made no sense for me; however, if I were paying full 30 (I wouldn't pre-pay the long term home at today's interest rates, money is too cheap right now) then points might make more sense.  

If I do refi this place with the intention of renting it out ~5 months later (and sleeping on some undergrad's floor for $350/month for the next two years) then I'll likely look into points as I'll want to keep it for the long term and try to rebuild cash right quick out of college for real home wherever that is.