For those of you who have thought about purchasing or refinancing, and have wondered if it makes sense to pay discount points to get a lower interest rate, Smart Money has an excellent article on understanding points.
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The article and calculator appears to be flawed. It apparently doesn’t count the additional principal paid off that comes with the lower mortgage interest rate even with its lower payment. It also doesn’t show what happens if you were to apply the monthly savings from the lower interest rate gained by paying points into the same investment vehicle for the money used if you didn’t pay points.
Their comparison for $100k 30 year mortgages – one with a 6% mortgage and another with 5.75% mortgage with 1 point – and a 6% rate of savings says it would take 91 months to break even. The $1000 saved by not paying 1 point turns into $1574, whereas the extra $16/month turns into roughly $1800 (my calculator for monthly deposit savings doesn’t show monthly balances) – plus you have an extra $275 in principal paid off after discounting the lost interest tax deduction at a rate of 28%. So, at what they call the balance point the person paying 1 point has saved about $500 more than the person who put that $1k into a different investment. It would be even more of a difference if we assumed the point paid was tax deductible.
The article is worth readin in one sense of the word and less worth reading in other sense of the word for the reason that it doesnt cover the foreclosure part.