Discount points and mortgage prepayment
I currently have about ,000 in seller credits which I plan to apply to discount points at closing (~600k loan). However, I'm also planning to prepay this 30 year mortgage, targeting 10-15 years for full repayment.
Would discount points even make sense when I'm planning to prepay so aggressively? Would it make sense to pay out of pocket for additional points or would it be better to put in a bigger down payment?
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The benefit of paying points makes less sense the more you prepay (or if you plan to move or refinance before the loan is up), since the benefit is a lower interest rate, and it will take some time for the interest savings to catch up with the cost for that savings.
You could do a quick rough calculation by looking at the payback period, meaning how long would it take to make up the difference in interest savings. That calculation would require the original balance and interest rate, and the new interest rate if you buy k worth of "points".
If the payback period is longer that the time it will take you to pay off the mortgage, then it's definitely not worth it. If it's close or significantly shorter, then it's possibly a better move, but you might also compare the difference if you just increase your down payment by K.
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