In this day of high inflation and the dropping value of the dollar, one wonders why should a borrower ever consider paying points to buy down the interest rate on their loan. Let's consider that a "discount point" is supposed to discount the interest rate that a borrower gets on their long term mortgage. This equals paying less on a monthly basis for your mortgage.
Let's make a generic example, let's say that a home buyer purchases a Southern California home for the price of $500,000.00 and puts down twenty percent or $100,000.00 so the loan amount is $400,000.00.
This conforming loan at a 30 year fixed rate of 6% would have a monthly payment of $2386.27/m. If 6% is the "par price" to the banks then it represents the cost of money to the banks at the time of the loan.
If the borrower decides to buy the interest rate down with one discount point (one percent of the loan amount) he would pay $4000.00 to do just that. If the extra discount point paid bought the interest rate down to 5.75% the new 30 year fixed payment would be $2323.16/m a monthly savings difference of $63.11/m.
Discarding the current inflationary economic cycle, the question is: How many months would you have to live in the home before the $4000.00 is recouped? To do that just take $4000.00 and divide by the monthly savings of $63.11 and you will get 63.38 months or just over 5 years in time.
In reality; however, if you take into account the cost of inflation vs. time cycle. If we forget the lowball inflationary statistics our beloved government espouses and compare the actual diminishing buying power of the dollar over the last six years and realize that in October 25, 2000 $1= € 1.21 while on Friday of last week $1= € 0.67 that is a total loss in buying power of 55.4% over six years or a decreasing value of our currency of 9.2% per year in the last six years!!!
So what you have to do is ask yourself, how much buying power does $4000.00 have today vs. say 5 years from now in actual monthly savings? If the current cycle remains the same and you apply these numbers to inflation, $4000.00 5 years from now will only have buying power of today's $2160.00 so you might reconsider utilizing that expensive $4000.00 in today's dollar that will only get you an adjusted savings in future monthly payments.
On one hand, the mortgage that you will be paying back, if it is fixed will also be much less in value as the years go by, but then again your dollar will have much less purchasing power, too. Although, United States goods may become more valuable overseas, most American families don't directly benefit from exporting goods. It will in effect make traveling overseas extremely costly---better stay close to home on your next vacation.
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