NEW YORK ( TheStreet) -- Whether to pay points is one of the bigger decisions a mortgage applicant must make, so let's make it simple: These days, paying this unwelcome upfront charge may well be something you can skip with a clear conscience. But, of course, it depends on the deal and your long-term plans. There are two reasons paying points might make sense today: Mortgage rates are extraordinarily low, making a future refinancing unlikely; and home prices, while rising, probably won't go up very fast. Those factors mean you could have your new mortgage for quite a few years, providing time for points to pay for themselves and create real savings. On the other hand, under today's conditions the long-term savings achieved by paying points are often pretty small. Given that, you might have better uses for the thousands of that points might cost. Points are upfront fees that get you a lower mortgage rate, with each point equal to 1% of the loan amount -- $1,000 for every $100,000 borrowed, for instance. Each point typically lowers the mortgage rate by 0.125 percentage points to 0.25 percentage points. United Savings Bank of Philadelphia, for example, offers two 30-year, fixed-rate mortgages. Pay no points and the rate is 3.25%. Pay 3 points and it's 2.875%. If you were to borrow $200,000, paying three points would add $6,000 to the closing costs. That's quite a sting, and many borrowers hesitate; it takes the thrill out of getting one of today's cheap mortgages. After all, 3.25% is unbelievably low -- why shell out $6,000 for such a small reduction in rate? If you can get past that gut reaction, it comes down to simple arithmetic. The lower rate will reduce your monthly payment, and if you have the mortgage long enough, that saving will more than offset the cost of the points. Using the United Savings example, the Mortgage Points Calculator percentage points shows it would take about a dozen years for those three points to produce savings -- a paltry $229. Sell the house or refinance the loan sooner than that and the points would actually increase your cost of ownership. But if you held the mortgage for the full 30 years, the points would save you $5,224.
That's real money, but actually not much of a return on a 30-year investment of $6,000. You'd have a good chance of earning much more in a good mutual fund, and you'd have access to your money at any time. Note that the calculator's assumptions are critical. It assumes, for example, that if you did not pay the points, you would add that $6,000 to the down payment, reducing the loan by that amount, and it assumes you would sell the home or refinance the mortgage after the period you've specified. If you hit the View Report button and look carefully at the details, you'll see two factors determine the effect of paying points. First is the savings from getting a lower loan rate, which reduces the monthly payment. The second is the loan balance you'd have after the period specified. Paying points means you start with a $200,000 mortgage, rather than the $194,000 mortgage you'd have if you used the $6,000 for a bigger down payment instead. That means you'd have a bigger loan balance after a dozen years than if you had not paid points. That offsets much of the savings from the lower mortgage rate. So the key factor is how long you'll have the mortgage. If you expect to stay in the home for decades, you may well have the mortgage you get today for the whole time. That's because history says the odds of getting a lower rate are slim to non-existent. If you'd taken out a mortgage a few years ago at 6 or 7%, there was a better chance than today that rates would drop, making a refinancing more likely. Under those conditions, paying points was risky because a refinancing opportunity could have led you to pay the mortgage off before the benefits of paying points were realized. Today's housing market, though improving, remains weak. If prices rise only slowly, or in fits and starts, it may take quite a few years to break even on a home purchase -- to be able to sell it for enough to come out whole after paying various fees from the purchase and sale. Therefore it doesn't make sense to buy if you expect to move in just a few years. If ownership is a long-term prospect, paying points is more likely to produce savings. But as the examples show, the savings may be quite small, and many borrowers would be better off using that cash for something else. Bottom line: you have to run your own numbers, to see if the combination of rates and points offered by your lender can produce real savings over the time you really expect to have the loan.