Buying points or paying down the loan amount?

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I have an extra $30k from a house build that was budgeted, but not needed.

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You went under budget on a house build? Bravo sir

We came in $28k under budget when we finished our renovation this year. Budgeted costs were based on prices in the middle of COVID with risk of price increases built in and actual costs came in well under that.

What does it look like when you do the math?

Without knowing all the details, it really is difficult to say.

Simple situation: $350k loan, 6.25% interest

Monthly note would be ~$2,155 and you'd pay over $425k in interest over the life of the loan.
Drop $30k on the first payment and you would be able to knock your loan down to just under 24 years and total interest would be just under $300k

If you want to buy points, you'd need to drop your interest by at least 1.75% for it to make sense. Then your note would be $1,775, and your total interest over 30 years would be $288k w/ minimal payments

You basically just need to find a good amortization schedule and start manipulating factors

I would go with principal reduction. You are sure to get the money back.

With points, may or may not based on how long you have that mortgage.

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There is a high probability you will be refinancing out of this loan so chances are the buydown doesn’t make sense at this time.

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Sounds like you're expecting rates to go back down. I don't think that is a safe assumption at this time.

Not exactly now but at some point in the next 4-5 years at the latest. It more than likely will take him that much time to recoup the rate buydown so wouldn’t make sense. Now obviously it depends on what the cost of that rate buydown is at for him today but what I am seeing lately is around that timeframe.

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There is a high probability you will be refinancing out of this loan so chances are the buydown doesn’t make sense at this time.

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Yeah that's similar thinking I had when I refinanced last spring. The rate was 2.5% and very unlikely that I would ever refinance that. So I paid 0.8 points to get it to 2.25%. The breakeven was 5-6 years and a bet I was willing to take.

Professionally I am advising clients not to buy down points because they most likely will be refinancing this loan in 2 years (hence the extra fees we are seeing in the market, the market is pricing for a refinance)- However, we will see rates go back to the 4s. And for you, the 5.25% isn't a crazy rate to pay for 30 years.

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Yeah, I guess the details could help.

Home Price: $700k
Down payment: 20%
Locked in at 6.25%

Wife plans on this being out forever house.

I have $28k extra to either pay down the loan amount or buy the points, which seems like I could easily get to 5.25%.

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Are you sure the 28k gets you a 1% reduction? You have that in writing?

Also, instead of a 30 year fixed have you considered a 15 year? That's another way to potentially lower your interest rate and money lost to interest if you can handle the monthly payment.

You'd be paying around $5k a month instead of just under $4k which adds some short-term costs - but you make it back on the back end if it doesn't endanger your finances.