When does paying points on a mortgage make sense?

Points and When to Pay Them

As borrowers go through the loan application process, the topic of "Points" and whether to pay them will arise. Points are fees paid to a bank to obtain a lower interest rate on a mortgage. One point equals one percent of the loan amount. A lower interest rate may result in a lower monthly payment—which sounds great—but it's also important to consider how long a borrower intends to be in a home, and to compare current rates to historical market trends before paying points.

For example, a $300,000 mortgage with one point, translates to an additional closing cost of $3,000. Let's assume paying a point will save $100 a month, but it will take 30 months to recuperate the cost of that point. If refinancing or selling the home before the 30-month mark, the cost won't be recouped, so it would be better to not pay points.

Interest rates run in cycles. When rates are at historical lows, it may be sensible to pay points. It is unlikely rates will go down much further, hence, no need to refinance later. But when rates are up, it's likely they will come down eventually, and the chance of refinancing in the future is greater.