Even if the study was right, what "most people" would profit from is beside the point. What matters is whether you would profit from it.

Well, then, how do I know whether or not it makes sense for me to pay points?

Points are an investment on which the return consists of lower mortgage payments in the future, and a lower loan balance if the loan is paid off before term, which almost all are. The investment makes sense for borrowers who have the money and find the return high enough to be attractive.

The standard view is that the borrower's time horizon must be quite long to make points worthwhile -- I have made this statement myself many times. However, when I recently calculated rates of return for different types of mortgages, I found that the standard view holds only for FRMs. On ARMs, the returns are high over periods equal to the initial rate period.

For example, while the return over seven years was only 8 percent on a 30-year FRM, on a 7-year ARM it was 22 percent. On a 3-year ARM, the return over three years was 17.5 percent. I found this so astonishing that 10 days later I looked again to be sure I hadn't made a mistake. Sure enough, I hadn't.

Do most borrowers pass up this opportunity?

They do. In the sample selected by Chang and Yavas, less than 15 percent paid points. Borrowers are predisposed against an increase in their cash outlays at closing for a benefit that will accrue in the future. Nobody tells them what the rate of return on investment might be. Often, they aren't even offered the option.

Mortgage brokers and loan officers don't encourage borrowers to pay points. Points make it more difficult for loan officers working for lenders to earn an "overage" -- a price above the lender's stated price, which the loan officer usually shares with the lender.

Similarly, if borrowers pay points for a lower rate, mortgage brokers are forced to disclose their own fees upfront where borrowers can see and possibly question them. The broker can't avoid disclosure when his fee must be added to the points. It is much better to steer the borrower to a loan with a rate high enough that the lender will pay points to get it, referred to as a "yield spread premium," or YSP. Then the broker can pay himself out of the YSP, which existing rules permit to be disclosed in ways that usually mean nothing to the borrower.

How can borrowers be sure that the option to pay points will be made available to them?

One of the advantages of shopping for a mortgage online is that the alternative rate/point combinations appear on the screen. The rates of return shown above were calculated from data shown by one such lender, Amerisave, an Upfront Mortgage Lender. Upfront Mortgage Brokers will also provide the required data. Since their fee is set upfront, they have no financial interest in which rate/point combination the borrower selects.

How do I find the rate of return?

You need two price quotes for the loan type you want. One is the rate/point combination with points closest to zero. The other is the combination for the lowest rate available. Using calculator 11c or 11d on my Web site, enter the two rate/point combinations and the period you expect to be in your house. Presto, you have the rate of return.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

Copyright 2007 Jack Guttentag