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Forgot to add to my question on 15-Year vs. 30-year loans--

What are points exactly? Why do we have to buy them? Is buying them worth the extra outlay right now?

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A point when referring to a mortgage loan is equal to 1% of the amount borrowed. So one point on a $200,000 loan would cost $2,000.

Points are used to "buy down" the rate on the mortgage. They amount to an upfront payment of interest. Since the buy-down reduces the interest rate of the mortgage, it reduces the monthly payment a bit.

Determining whether the up-front outlay is worth it depends on how far in the future the break-even point is.

As an example, let's say that one point buys down a 30-year fixed-rate mortgage from 5.25% to 5%. Going back to the $200,000 mortgage, the monthly principal plus interest payment is $1,104.41 at 5.25%, and $1,073.64 at 5%, for a difference of $30.77 per month. In broad strokes, the breakeven would be a little over five years. So if you were planning to stay in the house more than five years, the buydown would be worth it.

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One more thing to throw into the "points" mix.

If you invested the $30.77 in MBH's example above every month for 5 years, instead of applying it to the mortgage-you would have $2,276 bucks in the bank-if you used an 8% annual return. If you did that for 30 years (like a 30 year mortgage) you would have $46,164.

Now obviously no one can guarantee 8% return, but remember when you do these point scenarios, that the money you don't put against your mortgage payment, is money you can use.

If you just spend it on whatever, then the "forced" savings (money against your mortgage) the extra payment may be meaningful.

If you are on top of managing your money, and you put that "point" money to work for you, instead of for the bank, you generally will come out ahead....

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