To pay or not to pay, that is the question.

“We can offer 6.5% with 2 points, or 6.75% with one point. Which do you prefer?”Have you heard this before? A huge question that home owner’s and buyer’s alike ask me all the time, is “Should I pay points or not?”The simple answer to that question is, “it depends.” There are several factors that should be taken into account when deciding whether or not one should pay points. The biggest factor is the length of time one will own the home. To discover the answer one must simply find out how long it will take in order to recover the initial cost of the points.For those that are new to the home buying experience, a point is calculated as one percent of the loan amount. For example one point on a $100,000 mortgage would be the equivalent of $1,000 and 2 points would be $2,000. By paying a point or two one can reduce the interest rate of their mortgage. If that person is planning on buying this home and living there for the entire thirty years of his or her mortgage, I would suggest paying the point.For instance using the same figures as above, if the rate with 0 points is 7%, the rate for 1 point is 6.75%, and the rate for 2 points is 6.50% then the difference in interest paid over 30 years would be as follows. Over thirty years one would pay $139,510.98 in interest with no points, $133,493.79 with one point and $127,543.01 with two points. As you can see, the difference between paying zero points and paying two points is $11,967.97 over a 30 year period.The answer to the question, which as I said is, “it depends” is based on how long you will have the loan for. The break even number in the example listed above for either one point or two points is approximately 60 months. In other words, if you have the mortgage for more than five years, you will begin saving money. If for some reason you are out of the house prior to that five year period it was more expensive to pay the points than to finance at the higher rate. In other words, five years from the date you took the mortgage out, the amount of interest at the 7 percent would be equal to the amount you paid in points.Based on all of this information, the best answer can only be found by asking yourself. If you plan on living in this home for thirty years and never refinancing, then paying the points is the right answer. If you think you will be moving over the next few years than finance without the discount points.