Any magic number to decide between 0 closing costs and higher rate?

IS there a magic number to decide between paying 0 closing costs and a higher rate vs closing costs and a lower rate?

Or do I just take the difference in the closing costs paid and see how long it would take to come out even in my monthly payments?

annabanana said:

IS there a magic number to decide between paying 0 closing costs and a higher rate vs closing costs and a lower rate?

Or do I just take the difference in the closing costs paid and see how long it would take to come out even in my monthly payments?

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A good rule of thumb that's very simple is have a break-even point of 72 months (6 years) as that is about the average length people own a home for.  Take the total cost of the fee of the rate buy down and divide it by the monthly mortgage payment savings.  If that amount is greater than 72 months then you should probably not buy down the rate and if it is lower than you should by down the rate.  If you know that you'll only stay in the home for less than 5-7 years then you should consider going to with 7-year ARM and selling the fee to buy up the interest rate.  Also, keep in mind as rates keep going lower and lower it makes less and less sense to buy down the rate.  From a tax point of view, the fee you pay to buy down the interest rate is tax deductible and will appear on your 1098.

Any break even point less than 3-4 years out is the better deal between costs and rate. This does not take into account the tax benefit of paying points, or the tax consequence of a lower rate versus a higher rate. That kind of math has too many possibilities and with infinite options comes infinite confusion.  I defer this kind of calculating to USCCPA

If you are likely to retain the property for some time try and pay for the lowest rate you can today. Any rate, sub 4.875% is a screaming deal. It's essentially "Un-refinance-able" seeing that you'd have to get a zero fee refi rate sub 4.0% to make sense to act upon. I do think it's smart to buy the rate down because you're likely to hang on to the property for a great deal of time. I am in this scenario assuming little if any appreciation so selling to move up won't be as likely as we've seen in the past.

My .02c

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