Are points on a mortgage worth it?

[Michael Eng]

I am looking to get a rental property that cost 150k, putting 25% down. Using a 30 year fixed, I can either pay an interest rate of 4.5%, or I can pay 2 points and get a rate of 3.85%. Is it worth it to pay the points? Thanks for any help

[Chris Mason]

Originally posted by @Bruce W.:

You can get a cheap financial calculator or download an app to do the mortgage calculations needed to answer this question. I did the math and here's what I found:

mortgage amount = 112500

monthly PI payment at 4.5% = 570.02

monthly PI payment at 3.85% = 527.41

difference is $42.61 per month.

Dividing your points amount ($2250) by the difference yields just under 53 months.

If you keep the mortgage for 53 months or more, paying points will save you money.

There may also be some taxation concerns considering the deductibility of points, but I don't have that info.

 This is spot on math, and need not be further complicated for owner occupied real estate.

For investment properties, there's opportunity cost to consider. Basically a question to ask: Is there something else I could do with that $2250 that would allow you to increase cashflow/rents by ~$50 per month or more? This is a property specific question, as the answer will involve further questions like: what does the kitchen look like? What do the bathrooms look like? Etc.

$42/mo for $2250 has a CoC ROI of about 22%. If you aren't short on funds, the answer might just be to do both things -- buy the rate down for $42/mo of improved cashflow, AND do the kitchen upgrade that will allow it to command $50/mo more in rent. Eventually you will come up against diminishing returns (replacing two year old non-stained carpets, for example, probably isn't worth it), but these little >20% CoC ROI things add up. If it's a turnkey property that already has the brushed aluminum oven, fancy new fridge, etc etc, then it's more likely that the rate buydown will be among the more solid possibilities.