Should I buy discount points on my next refinance?

Before you decide if you will buy some discount points on your next refinance, please do the math!

You have to decide how long you are willing to keep the mortgage. It is a very simple calculation. If you use 2 points to buy the rate down on a $200,000 mortgage, it will coast you $4,000 in discount points (REAL discount points, be careful and read your Good Faith Estimate!).

Let me show you if your rate goes from 6.5% to 6% with 2 discount points:

Monthly payment on principal and interest for a $200,000 mortgage loan (30 year Fixed) at 6.5%: $1,264.14

Monthly payment on principal and interest for a $200,000 mortgage loan (30 year Fixed) at 6%: $1,199.10

A difference of about $65 a month. Now take $4,000 and divide it by $65. It will take you 61.54 months (over 5 years) to get your money back and get even (not including the other fees you will pay).

Once again, please take the time to read your Good Faith Estimate (GFE). If your loan officer gives you number over the phone, make sure you ask for your GFE. Make sure you read every line of your GFE and ASK questions. Did I mention to ask questions?

Now it is time for you to get a pen an paper (OK, your computer) and do the math and make sure your numbers fit your goals (You must have some goals if you are looking at a refinance?). By the way, you should not buy the rate down on any Adjustable Rate Mortgage (ARM)! A very simple reason, if your rate goes up 1 to 2% after the fixed period then you will want to refinance and get a fixed rate.

Enjoy!