Q: We are buying a home we plan to live in for a long time. After the down payment and closing costs, we will still have some cash left over. Our lender mentioned we could “buy down” our interest rate by paying points. Is that worth it, or should we hold on to the money? — Robert

A: For buyers in your situation, paying points to lower your rate can be a smart use of extra cash. What matters most is how long you keep the loan, and since you plan to stay a long time, that works in your favor.

Here is how it works. When you get a mortgage, most lenders let you pay money up front in exchange for a lower interest rate for the life of the loan.

Each “point” costs 1% of the amount you borrow. On a $400,000 loan, one point costs $4,000. Each point usually lowers your rate by about a quarter of a percent, though this varies by lender.

Let us use real numbers. Say you borrow $400,000 at 7%. Your monthly payment, not counting taxes and insurance, is about $2,660. If you pay two points ($8,000) and your rate drops to 6.5%, your payment falls to about $2,530. That saves you about $130 a month.

To see whether it is worth it, divide what you pay by what you save each month. $8,000 divided by $130 is about 60 months, or five years.

That is your break-even point. If you keep the loan longer than five years, you come out ahead. If you keep it for the full 30 years, you save about $48,000 in interest for that $8,000.

The risk is refinancing. If rates drop and you refinance in two or three years, the money you paid in points is gone, and you never recoup it.

With rates as high as they are right now, that is a real possibility. Ask yourself whether you would refinance quickly if rates came down.

You should also compare points with putting more money down. That same $8,000 added to your down payment would lower your payment by only about $50 a month, so points usually come out ahead.

The exception is private mortgage insurance. If a larger down payment would get you to 20% and let you avoid that insurance, the down payment may be the better choice.

Before you spend the money, make sure you still have enough set aside for emergencies. A lower rate does little if a job loss or a new roof leaves you short.

Then get Loan Estimates from more than one lender. Each lender prices points differently, so the same amount may buy a bigger rate cut from one lender than another.

Points may also be tax-deductible, so ask your tax advisor how they apply to you.

If you have a cushion, plan to stay put, and would not be quick to refinance, buying down your rate is a sound way to reduce your overall cost over the life of your loan.

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