Juan: ‘I think that it is OK to pay points when you take out a mortgage if you finance them (i.e., they become part of the mortgage). This way, you put the cash you would have paid for points to use in another investment at the same time as you get to enjoy the lower interest rate you got for paying the extra points.’

☞ I disagree, at least for most people. Here’s the thing: the only difference financing the points (or other closing costs of your mortgage) makes is that you now are paying them plus interest. Let’s say, after-tax, the effective interest rate on your mortgage is 4%. By adding the $6,000 in points (say) to the principal amount of your mortgage, you are just borrowing that much more ($306,000, say, instead of $300,000). So for someone who can easily make more than 4% on his money after tax, you’re right: financing the points makes sense, and can make paying extra points in order to secure a lower interest rate marginally more attractive (but only marginally). For someone who will make less than 4% after tax on their money, financing the points actually raises their cost. (And, of course, for someone who makes exactly 4%, financing the points is a wash.)

Well, you may ask, how is it possible for anyone to make less than 4% after tax on his money? And I would suggest that in a bank you will make less, in short-ish-term bonds you will make less. And if you go for the stock market or long-term bonds, there is the chance (if interest rates rise) you will make much less.

In short, I’m not sure that financing the points really does make them appreciably less costly for most people (and could actually make them more costly). Which brings us back to the straight calculation: Will the cost of the points be justified by the lower annual interest rate? And that, I think we agree, depends on the factors I cited. Sometimes the points will be justified, sometimes they won’t. Whether to finance them or not is a separate, less important question. It simply depends on whether you will earn more on that money than it costs you to borrow it.

QUESTION FOR YOU

I was just in Salt Lake and learned that it is ten times saltier than the ocean. Is this where anchovies come from?

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