Buying down interest rate with points up front

[Jason Howell]

Working on a loan for a duplex that I'm psyched about. I'd love your thoughts on paying down interest rate up front with points. I'll use an example with similar numbers because I want to truly understand the reasoning here:

On the high end, the interest rate would sit around 5.75%, at the cost of -.125 points (ultimately resulting in a lender credit of $164) and a P&I of $766 per month ... on the low end, the interest rate would be 5.375% at the cost of 1 point (around $1300) with P&I of $735 per month.

Given that info, this is to say that if I planned on holding onto this property more than 42 months (that's $766-$735= $31 per month... then $1300/$31=41.94 months), then it would make financial sense to pay down the percentage rate up front at 1 point because beyond 42 months, I'd be saving money every month... If my plan was to hold onto this short term (let's just say 2-3 years out of thin air), it makes no sense to pay the point up front and I would opt for the higher percentage rate per month.

I know I've heard/read that some people would argue that it rarely ever makes sense to pay the point up front, but if its a long term play, I don't truly understand why that might be...

Any info appreciated! Thanks!

[Joe Villeneuve]

The reason why it doesn't make "cents" is it doesn't make dollars.  Here is what you're missing - "who is actually paying the interest vs. who is actually paying the points"?

As long as you have positive CF, your tenant pays the interest. The ONLY money you pay, thus the ONLY cost to you, is what comes out of your pocket. AS long as you have PCF, you could have 25% interest, and if your DP didn't change, your cost would remain limited to the DP.

The correct way to look at all of this isn't "what does a property cost me to own", but rather "what does a property cost me to control".

Now, the interest rate DOES impact the CF, but as you've already noted it would take 42+ months just to break even.  For me, that's not going to happen.  Your "recovery" of the cost of those points comes in tiny little $31 increments over a 42 month span.  The money you spend on it ($1300), happens immediately.  What else could you use that $1300 for that would actually put money in your pocket...instead of your lenders?