Whether you’re buying a home or refinancing, there’s a moment you’ll have to choose whether to pay points or not.

Today there’s a new wrinkle. Is the extra expense of points worth it when interest rates are already at stunning lows?

In fact, paying points can be more profitable when rates are low — but only marginally so. It takes years for an investment in points to be profitable, so this option should be weighted against alternative uses for the money.

Points are upfront interest charges that go to the lender the moment the deal is closed. Each point equals 1% of the loan amount. One point would cost you \$1,000 for every \$100,000 borrowed. Freddie Mac (Stock Quote: FRE), the government-backed mortgage company, says the average 30-year fixed-rate mortgage charges 4.49% and 0.7 points.

If you pay points, you get a slightly lower mortgage rate — historically each point reduces the loan rate by 0.125 to 0.250 percentage points. The lower rate reduces your monthly payment. You come out ahead if you have the loan long enough for that savings to exceed the cost of the points. The Mortgage Points Calculator can guide you through the math.

The calculator figures your total costs over a given period with two alternatives — paying points and getting a lower rate, not paying points and using that cash for a bigger down payment, which reduces the loan amount and monthly payment.

The calculator’s default figures show the effect of paying two points to cut the loan rate from 6.5% to 6% on a \$200,000 loan. After 10 years, paying points would have saved the borrower \$4,770 in monthly payments. But the borrower’s loan balance would be \$1,210 higher because it started at \$200,000 instead of \$196,000. So the borrower’s total savings would be \$3,560.

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Let’s look at the same loan using current interest rates. The mortgage search tool shows it’s fairly easy to find a 30-year fixed-rate loan at 4.75% with no points or 4.25% with about two points.

With those rates, the calculator shows that the borrower with the \$200,000 loan would save about \$3,955 over 10 years by paying two points — slightly more than when rates were in the 6% range. Of course, if you kept the house longer you’d save more — \$10,721 over 20 years or \$13,877 after 30 years. (The principal balance is no longer a factor after 30 years, as the balance is zero whether you pay points or not.)

Clearly, the long-term borrower can save money by paying points, but it pays to stand back and look at the big picture. After 10 years, the savings average about \$400 a year, not exactly a draw-dropping figure.

Points are a kind of investment in the home. Pay the total sum up front and you’ll get it back piecemeal through lower payments. There might be other, more immediate uses for that \$4,000, such as repairs on the home, paying down credit card debt or paying for a child’s education.

Forgoing points and paying a bigger down payment instead is a long-term commitment, as you could not get the money back without selling the property or obtaining a new loan.

There is a third alternative: Invest the money. Spending \$4,000 on points to save \$3,955 over 10 years is like investing at an annual return of about 7%. That’s not bad considering it’s a guaranteed return, but you could gamble on a better return in stocks and at the same time keep your money liquid.

Obviously, paying points won’t save you enough to get rich. The calculator proves you’d have to keep the mortgage for five years before two points would save you enough to offset their cost. To justify paying points, you must have the loan for the long term and not have a better alternative — an immediate need or promising investment.

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