Dacey says the par rate is so low today -- autumn 2011 -- that the lender doesn't give the borrower the option of paying discount points to lower the rate further.
Low-rate refinance
Paying points to get a lower rate is a strategy that tends to appeal to established homeowners who plan to keep their loans until they're paid off, Thompson says.
One way to analyze the benefit of points is to calculate the payback period, Thompson says. Also called the break-even period, it's a measurement of how long it will take for the accumulated monthly savings to add up to the upfront cost of paying the points.
Compare $200,000 mortgage with/without 1 discount point
| Par loan | Discounted loan |
| Interest rate | 4.25 percent | 4.125 percent |
| Discount points paid | $0 | $2,000 |
| Monthly payment | $984 | $969 |
| Monthly savings | - | $15 |
In the above example, the borrower pays $2,000 upfront in the form of one discount point to save $15 a month. At that rate, the payback period is 11 years, 2 months. ($2,000 divided by $15 a month equals 133.3 months.)
A borrower who plans to move or refinance within 10 years wouldn't benefit from paying a discount point in that scenario because it takes more than 11 years of monthly savings to make up for the $2,000 upfront cost.
Dacey says paying points can make sense for homeowners who plan to live in the house far past the break-even date.
One other tip from Dacey is that loan pricing has become much more sensitive to credit scoring, which means late or missed payments on credit cards, auto loans and the like will trigger a significantly higher rate and closing costs for a mortgage, regardless of whether the borrower pays points.
The bottom line is that borrowers should do the math and not ignore the effect of points in their quest for the lowest possible rate on their loan.