What's the point?

A worse scenario is paying a point or more for a 30 year and rates drop dramatically. You have an opportunity to really get a low rate for yourself but you haven't come close to earning your investment in points back so you hesitated to move hoping that in subsequent years you will have another chance after you have earned your money back. That is compounding a mistake in my estimation and yet I understand the reason for the hesitance.

The last of the good choices to exercise paying a point comes in a variable loan scenario.

Variables have a start rate, an index and a margin. The start rate for the most part is irrelevant (stay tuned), the index is the benchmark for changing the variable rate and the margin is what you add to the benchmark (index) to determine the rate at every change date.

You cannot influence the index (Libor, MTA, Prime etc.) as these are national or international figures set by the open market or in the case of Prime by the major banks.

What you can do to help yourself is buy down the margin and your interest rate (index plus margin) will be lower. Every time the variable changes wouldn't you rather add 1% to the index than 2%? That is what buying down the margin can do for you. Buying down the start rate might help in the beginning of the loan but after one or two rate changes it doesn't compare to a lower margin.

Points are deductible on purchases and must be amortized over the life of the loan on refinances. When you refinance a refinanced loan with points the life of the loan is over and any unused portion of the point(s) can be expensed in the year of the second refinance.

Example: $300,000 loan on a 15 year fixed with one point ($3000) will have a $200 a year deduction as the loan is amortized over 15 years. If after three years the house is sold and the loan is paid off or you refinance for some reason then $2400 that hadn't been expensed could be expensed at that time. A nice bonus of a tax deduction which few people even realized is available.

Points and their usage isn't rocket science but are nevertheless important for your financial well being. Use them wisely when you should and avoid them when they don't make sense and most people can feel that they did something for themselves by simply understanding the what (they are) and when (they should be used) as a financial tool available to you.