In the given discussion, I am buying a house on mortgage and the amount of money I am loaning is $400,000 at 6.5% APR. My monthly payment for next 30 years will be $2,528.27.
On the other hand, if I accept the bank’s offer and buy a point which is worth $4,000, my loan amount will reduce to $400,000 and my APR will reduce to 6.25%; my monthly payment will reduce to $2,462.87.
By buying the point I will have to pay $4,000 upfront and doing so will save me $65.4 every month.
Considering the facts above I will have to calculate the amount of time it will require for me to recover my $4,000 through savings on payment. Therefore;
Down payment/Saving on payments every month
= $4,000 / $65.4
= 61.16 months
61.16 months / number of months in a year
= 61.16 months / 12 months
= 5.1 years
Based on the calculations above, it will take me 5.1 years to recover $4,000 that are required to buy a point. Thereon, I will be saving $65.4 every month on my mortgage payment. Therefore, I will only buy the point if I am planning to stay in the house for any amount of time longer than 5.1 years.
- If I am planning to stay for less than five years, I should NOT buy the point.
- If I am planning to stay in the house for 5-15 years, I should buy the point as I will be saving $65.4 every month after the first payment of the sixth year.
- I should definitely buy the point if I am planning to stay in the house for the whole duration of 30 years as I will be saving $65.4 every month after 5.1 years.
However, these calculations do not include the rules of time value of money since $4,000 today are more valuable than if payed over a period of 5.1 years. My answers may change based on the interest rate I am getting if I invest the same amount of $4,000 somewhere else.