If I’m planning to buy a house and pay over 20% down (to keep the monthly payment manageable), it would be stupid not to buy points with that extra money down, right? Or am I not understanding how buying points works?

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It’s only worth paying points if you will be in the house a long time. Assuming that rates are heading up and will never be this low again, you might want to pay points to get a lower rate. However if you will sell in less that 5 years, it’s probably not worth the cost to get the lower rate. If rates are going down, you would never pay points because you can always refinance in 1-2 years and get a lower rate without paying for points.

Wouldn’t it just depend on how the math works out? You should be able to project out how much buying points would save you in the time horizon you’re looking to stay in the home.

So is the alternative to buying points just putting more toward principal? That would not affect the interest rate correct?

Or just keeping the money in your pocket. Let’s say the house is $1M and you have $208k cash and the loan is 3.75% with no points or 3.5% with 1 point with 20% down. So each point is $8,000 and the .25% interest reduction saves you $2000 in interest in the first year and that savings decreases a tiny bit each year. However that interest is also tax deductible if you itemize so it’s worth less than $2000 (if you itemize). So the break even on paying the point is between 4 and 7 years depending on your tax situation. (Points are also tax deductible but you have to spread that over the 30 year life of the loan). You could instead pay the $8k towards principle. That saves you $300/year in interest. Or you could invest the $8k and hope to get more than 3.75% in the market.

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