A borrower can buy a lower interest rate by paying points up front

One discount point is 1% of the loan amount

Lenders periodically establish point schedules that show what interest rate they are willing to offer if the borrower pays a certain amount of points

A quick and simple breakeven analysis can be used to determine whether the borrower should pay the points

The dollar value of the points / monthly payment savings = number of months required to recoup the points

If the borrower expects to live in the house for the breakeven number of months or longer, it is worthwhile to pay the points

Assume you obtain two quotes with and without (discount) points: either 7.2% APR without point or 6% with 2.5 points.

(4) For the 6% APR loan with 2.5 points, how much do you need to pay for the points?

(5) What is the NPV of paying the points? (i.e., the PV of savings in monthly payments over the life of the mortgage loan net of the initial payment for points)

(6) How long must you stay in the house to make it worthwhile to pay the points to lower down the interest rate, assuming the savings in payments can be reinvested at the same rate?