Thinking about refinancing...do points ever make sense?

[hightower]

I’ve been looking at refinancing our mortgage since rates have been down. Right now we’re at 3.85% fixed 30yr. Just moved last August so only 9-10 months into it. Balance is 392k on a house worth 510k. We have no other debt.
I’m interested in lowering our payments and total interest paid over the life of the loan. I plan on paying off the loan early if I stay employed as a physician long enough (long story I’ll spare you) but in the event I no longer have high income my goal would be to pay the minimum payments only over the life of the loan. We have no plans on ever moving again (we live on the farm where my wife grew up and several generations of her family have lived since migrating from Germany in the 1930s).

Anyway, the rates I’m quoted for a new 30 yr fixed are 3.29% with around 3k in total closing costs. Payments $207/mo cheaper. Would take about 14 months to break even on the closing costs.

My question is would it ever make sense to pay points for a lower rate? For $3900 more in closing costs (1 point) we could get 3.09% fixed for 30 yrs. Payments $260/mo cheaper. About 26 months to break even.

Just for fun, 2 points would be $10,800 in closing costs and the rate would be 2.79%. Payments $310 cheaper. 34 months to break even.

My thinking is that if I ever get into a situation where I dont make high income anymore, having as cheap of a monthly payment as possible could be very beneficial though the difference in payments is not huge. So not sure how to judge if it’s worth it.

I’ve been watching rates for weeks and I’m not seeing them change much.

Thoughts?

[Tim]

“ I plan on paying off the loan early if I stay employed as a physician long enough (long story I’ll spare you) but in the event I no longer have high income my goal would be to pay the minimum payments only over the life of the loan”

Obviously it depends on when you payoff the principal early. You might consider a slightly different strategy called recasting. Check to see if it might be available with the lender. Could impact when you actually pay down the loan (periodically or lump sum).
https://www.bankrate.com/mortgages/w...and-why-do-it/

[Cubicle]

Yes points make sense if you will keep the loan long enough to get past break even. The problem is people typically move too often to get past break even.

[jhwkr542]

If the math works out, the math works out. So yes, points can absolutely make sense. But you don't compare the loan with points to your current loan, you compare it to the new loan without points. So the points for $10,800, that knocks off an extra $103/mo, so about 8-9 years you'll need to have the loan for getting those points to make sense.

[Gamma Knives]

I'm rarely a fan of paying points as the time to break even is usually so long. In that time, most people sell or refinance (or sometimes pay off early). Furthermore, most calculations don't include time value of money or inflation. When you consider these factors, I think it is better to put the money into a different investment.

[East coast]

As was mentioned in the above two posts, I suspect you aren't quite correctly accounting for the break even point if it's only 2-3 years. To my knowledge it's more like 6-9 yrs typically, but i'm sure that changes and maybe in this environment it's come way down.

This is kind of an insurance product that the mortgage underwriters have figured out to make more money (for the bank) by 'pre-charging interest' to you, so over the long run, they make out with more money (if they don't, they are bad at math), but that doesn't mean technically you can't come out with the better - just that the chances are highly against you as in any insurance product.

[ENT Doc]

I’ve been looking at refinancing our mortgage since rates have been down. Right now we’re at 3.85% fixed 30yr. Just moved last August so only 9-10 months into it. Balance is 392k on a house worth 510k. We have no other debt.
I’m interested in lowering our payments and total interest paid over the life of the loan. I plan on paying off the loan early if I stay employed as a physician long enough (long story I’ll spare you) but in the event I no longer have high income my goal would be to pay the minimum payments only over the life of the loan. We have no plans on ever moving again (we live on the farm where my wife grew up and several generations of her family have lived since migrating from Germany in the 1930s).

Anyway, the rates I’m quoted for a new 30 yr fixed are 3.29% with around 3k in total closing costs. Payments $207/mo cheaper. Would take about 14 months to break even on the closing costs.

My question is would it ever make sense to pay points for a lower rate? For $3900 more in closing costs (1 point) we could get 3.09% fixed for 30 yrs. Payments $260/mo cheaper. About 26 months to break even.

Just for fun, 2 points would be $10,800 in closing costs and the rate would be 2.79%. Payments $310 cheaper. 34 months to break even.

My thinking is that if I ever get into a situation where I dont make high income anymore, having as cheap of a monthly payment as possible could be very beneficial though the difference in payments is not huge. So not sure how to judge if it’s worth it.

I’ve been watching rates for weeks and I’m not seeing them change much.

Thoughts?

See the Excel spreadsheet near the bottom of this thread and the discussion:

https://www.whitecoatinvestor.com/fo...-buying-points

[hightower]

Thanks for the replies and thanks for linking to that previous thread.
I'm leaning towards not paying points just because I hope to save more by paying down the principle quickly. I've been making an extra $2-3k payment each month and I plan on continuing to do that as long as I can or until the mortgage is paid off. I definitely think it's worth refinancing though because if I do and I take the full 30 years to pay it off, it would save me around 40-50k in interest compared to if I didn't refinance at all. That's not bad for putting 3k into to closing costs right now. However, if I end up paying it off in say 10 years, the savings won't be as dramatic, but I'd still be saving interest every month. I guess I could calculate that out exactly what that would be, but I'm sure I'd get back the closing costs in no time either way.

[Hober Mallow]

How aggressively have you shopped for mortgage rates? That's not a terribly competitive offer.

Take a look at the last couple pages of the Refinance Mega Thread on Bogleheads. A lot of people are finding 30 year mortgages at <3.0% with no closing costs (lender credits greater than all costs). Get quotes from LenderFi, Better, AimLoan, LoanDepot, Northpointe, and Sebonic. Also Owning if you're in California. Once you have one official loan estimate, send it to all the others and get them to beat it.