New REI - Buy Points or not?

Question

Hi BP members,

I'm looking for advice whether or not I should buy points from my lender. I have an option to refinance at 3.875% at 0 costs or I could save $189 at 3.125% at $12.5K cost. It would take 5.5 years to make the money back. From what I can tell, most people do not buy points but I'm wondering if it makes sense to buy it in this case. Rates are at historic low and I can't imagine the rate would go below 3%. However, I'm new to investing and would love to get the opinions for those who've done this much longer than me.

Thank you!

Chris Kim · Answer

Hi @Ralph Justiz, @Chris Mason and @Kevin Romines

Thank you all for taking the time to comment and guiding me. I did decide to buy points as I believe it's the best route to go since we are not planning to move anytime soon. Thank you!

Chris Mason · Answer

You're placing a bet that you will neither sell nor refinance in the next 5.5 years. View it as such, a bet, but at least it's a bet where you have inside information... you know better than "the house" if you're likely to sell or refi in the next 5.5 years, the "house" (bank) is betting that you will. This is just about the only time that you get to walk into a casino and know more than they do about what cards are in play.

The counter-argument to this. What rates drop, and in a year, you could get 3.125% at no points, or for only half of what it would cost you today? You will, in that case, be kicking yourself. You are ALSO betting that this will not occur, and in this case neither you nor the bank has any insider information on that (if the lender knew that, they wouldn't be schlepping mortgages, they'd be on Wall Street placing bets there, and not talking to you... and if YOU knew that, accurately, you'd already be so rich as to not need a mortgage at all).

Kevin Romines · Answer

Buying down the rate always comes back to your future plans and time frame. As you mentioned it will take 5.5 years at that lower rate for you to recoup the cost of the buy down. That means, you have 24.5 years potentially that you would have an extra $189.00 per month. That translates into a savings over the life of the loan of $55,566.00 assuming you stay in that loan for 30 years.

Also, buying points is tax deductible. So if you are close to being able to itemize on your tax return, this can put you over the top and allow you to write off the $12,000.00 cost. So if you were in a 25% tax bracket, it means that you get to make the equivalent of $3000.00 that you wouldn't be taxed on, because of the write off.

Further if this is an investment property or if it will become one down the road, you get the added benefit of cash flowing better and the refinance costs raise your basis in the home, therefore if you ever sell, you will have paid a little less in taxes due to an increased basis.

I'am refinancing my home as we speak. I'm buying down points, because I will live in this home until I die.

Ralph Justiz · Answer

Most would say no don't purchase the buy down but if you have cash to spare and it won't affect other parts of your life I'd say do it! That being said if you plan on making extra payments on your loan or paying the loan off early the buy down would not be worth it.