When you take a loan for a home purchase, the rational thing to do is to grab the lowest interest rate offered, right ? But that usually comes with an another variable, points. A point equals 1% of the loan amount, and lenders typically offer you to buy some points in exchange of a reduction in rate. So what will you do, pay some cash upfront to lower your rate, or take up a slightly higher rate ?

Basically it all comes down to a threshold number of years that you plan to stay in your home before selling it. If you take a higher rate then you must sell the home within N years to come out ahead versus taking the lower rate.

A nice calculator is here: Time to recover cost of points

A good read: Choosing Rates vs. Points in a Mortgage Loan

Here is how to use the calculator: Suppose you want to know if it is worth paying $2760 in upfront costs to reduce interest rate from 4.875% to 4.5%. Here is the calculation. We see that the break-even is 3yr 10months, that means the lower rate will be beneficial if I stay in the home for more than that duration.

Now some of you will argue that it is better to get a no-cost rate, but that rate will be higher than a lower rate at a cost. Suppose you get a no-cost rate now and then the rates went up, you can end up missing the opportunity of securing a lower rate which could be worth the upfront costs in a few years.