To pay points, or not to pay points; that is the question

[Sean Kruger]

Hi all, I am curious to your thoughts on when to pay points or maybe take a credit for a higher rate.  I ask because we are in the process of a cash out refi on an investment property with closing costs of about $2400(I exclude prepaid interest and funds for an escrow account).  The options being no points at 4.375% or get a get a credit to cover the closing costs of $2400, but take a rate of 4.75%.  The loan will be $170k 30y fixed.

More precisely my question, is do you simply look at the cash flow difference between the loan, or the extra interest on an amortization schedule to figure out the break even.  I ask because everyone I seem to talk to says the cash flow method which would be about $38/m making the break even point 63 months.  However I was trying to explain that the first month interest amount was $620 vs $673 for the higher rate making the difference $53 making the break even about 45 months and this is a truer way to view the cost of points/credits.  Note, I do understand that the monthly interest being paid will be increased each month, but the difference between the two rates should be about for the same for a period of time.

So, am I missing something with my logic, or is the cash flow difference is easier to explain and most people just care about the money out of their pocket each month.

Thanks in advance, Sean from Arizona

[Steve Vaughan]

I would focus on the benefits vs non-benefits of refinancing at all.  How much are you cashing out?  Is $2400 a large %?  I wouldn't pay $2400 to get $10k, for instance.  That's 24%!  

Is the cash out money going to propel your returns going forward? Could you save it up and not go through these fees and headaches altogether?

Is your current rate better than 4.375%?  Don't jump over common sense analyzing $38/mo in cash-flow too much @Sean Kruger.  Sometime no action is best in the long run.