What are your options for Buying Down your Mortgage Rate?
First let me explain what buying down your rate means. As your are about to close on your house loan you will have the option to buy down the interest rate on your mortgage, normally one eighth of a percent (one point) at a time. Let's say you have a $300,000 mortgage for 6% at $1798.65 per monthfor no points. For an upfront fee you will be able to buy down the interest rate to 5.875 % (one point lower) or 5.75 % (two points) or lower. By doing this you will lower your payment by a certain amount (in this example $24.04 per month per point).
I always recommend buying down the first point or 1/8th of a percent. Since the real market interest rate in our example is somewhere between 5.875% and 6% you will not pay the full amount to buy down your loan to 5.875% interest. This will lower your monthly payment in this case by $24.04.
If the cost to buy the first point is significantly less than $4,010 then it is worth buying the point.
If you buy the next point it will probably cost close to $4010 and it will cut your payments by $24.04 per month again. You could use the $4010 to pay down the loan and it will have the same effect.
The advantage definitely goes to paying down the loan because you will end up with the same payment but your balance owing will always be lower. If you sell your home before the loan is paid off you will have a lower balance.
Definitiion of a Point. 1/8th (.125) of a percent of your loan.