If a buyer compares two mortgage options, the break-even point on paying points is how many months?

If a buyer compares two mortgage options, the break-even point on paying points is how many months?

• A. 60
• B. 55.0
• C. 57.6
• D. 72

Answer: (C)

When you pay points, you’re buying a lower interest rate with an upfront cost. The decision hinges on when the monthly savings from the lower rate equals that upfront cost. This is the break-even point: the number of months it takes for the accumulated monthly savings to cover what you paid at closing. To find it, divide the total cost of the points by the monthly payment reduction caused by the lower rate. The result is the number of months you’d need to keep the loan for paying points to make financial sense. In this scenario, those numbers work out to about 57.6 months. So if you plan to keep the loan for longer than roughly 57.6 months, paying points tends to pay off; if you’ll have the loan for a shorter period, skipping the points is usually better.

When you pay points, you’re buying a lower interest rate with an upfront cost. The decision hinges on when the monthly savings from the lower rate equals that upfront cost. This is the break-even point: the number of months it takes for the accumulated monthly savings to cover what you paid at closing.

To find it, divide the total cost of the points by the monthly payment reduction caused by the lower rate. The result is the number of months you’d need to keep the loan for paying points to make financial sense.

In this scenario, those numbers work out to about 57.6 months. So if you plan to keep the loan for longer than roughly 57.6 months, paying points tends to pay off; if you’ll have the loan for a shorter period, skipping the points is usually better.