how do you calculate if it is worth paying points on a mortgage?

1 - You need a mortgage calculator, like this one: http://www.mortgage-net.com/calculators/mp_cl.html

2 - Determine how long you plan on owning the house. Just guess based on your current life situation. A good average is about 5-7 years. That is, do you imagine you'll still be in your house for less than 5-7 years or longer?

3 - Find out what the mortgage rate difference is based on the points you pay. Points are also known as "discount points," because paying more points up front usually gets you a discount on your interest rate.

4 - Enter the two different interest rates into the mortgage calculator (one at a time, obviously), and use the tables on the calculator results to determine how much more interest you would pay with the higher rate versus the lower rate over the time you estimated in step 2.

5 - Multiply the loan amount by the number of points to determine how much additional cash you have to come up with to pay the points (multiply the loan amount by .01 for every point they are charging you).

6 - The difference between the figure you came up with in step 4 and in step 5 will be the difference between how much you're paying in points versus how much more you would pay over time at the higher interest rate.

At the time (in years) where the two figures are nearly the same, this is called the break-even point. This is where it makes no difference financially whether you pay the points up front or just pay the higher interest rate.

Again, the most common break-even point is usually about 5-7 years. So, the general rule of thumb is: If you think you're going to be in a house for less than 5-7 years, don't pay the points. But, if you think you're going to be in the house for longer than 5-7 years, pay the points.

The proper way is to calculate a break-even period that takes account of all costs ... The Break-Even Period For Paying Points on a Mortgage ... "Re your column on 'How Much Is a 1/4 Percent Rate Reduction Worth? ... The $3000 discount paid upfront, for example, would have earned about $2000 in interest if it had been ...

My answer: Never do points.

Remember: You can always pay extra towards a mortgage once you move in and get settled and start building that emergency fund back up.