Mortgage Points Calculator
Determine if buying discount points will save you money on your mortgage
| Metric | Without Points | With Points | Difference |
|---|---|---|---|
| Interest Rate | - | - | - |
| Monthly Payment | - | - | - |
| Total Interest Paid | - | - | - |
| Total Cost Over X Years | - | - | - |
Discount points are upfront fees paid to lower your interest rate.
1 point = 1% of your loan amount.
Each point typically reduces your rate by 0.25% (varies by lender).
Points are paid at closing and may be tax-deductible.
Consider buying points if:
• You'll stay in the home beyond the break-even period
• You have extra cash and want lower monthly payments
• Rates are expected to rise (refinancing later would cost more)
Avoid points if: You may move or refinance soon
| Date | Loan Amount | Points | Break-Even | Savings | Currency | Actions |
|---|
Mortgage Points Calculator: Should You Buy Down Your Rate?
Learn how mortgage points work and use our calculator to determine if buying points will save you money on your home loan
When securing a mortgage, you'll often hear about "points" - an option to pay more upfront to lower your interest rate. But is this financial strategy right for you? Our comprehensive guide and calculator will help you make an informed decision.
In this article, we'll explore what mortgage points are, how they work, and when they make financial sense. Use our interactive calculator to analyze your specific situation and determine if buying points is a smart move for your mortgage.
What Are Mortgage Points?
Understanding Mortgage Points
Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. One point typically costs 1% of your loan amount and lowers your interest rate by 0.25% (though this can vary).
There are two main types of mortgage points:
- Discount Points: These lower your interest rate for the life of the loan
- Origination Points: These are fees lenders charge for processing the loan
When people discuss "buying down the rate," they're typically referring to discount points, which is what our calculator analyzes.
How Mortgage Points Work
The Cost of Points
Each point costs 1% of your loan amount. On a $300,000 mortgage, one point would cost $3,000. This is paid at closing as part of your upfront costs.
Interest Rate Reduction
Typically, each point reduces your interest rate by 0.25%, though this can vary by lender and market conditions. Some lenders may offer more or less reduction per point.
Break-Even Point
The key calculation is determining how long it will take for your monthly savings to equal the upfront cost of the points. This is your break-even period.
Long-Term Savings
If you stay in the home beyond the break-even point, you'll save money over the life of the loan. The longer you stay, the more you save.
When Do Mortgage Points Make Sense?
Scenarios Where Points Are Beneficial
When to Consider Buying Points
- Long-term homeownership: You plan to stay in the home beyond the break-even period
- Sufficient cash reserves: You have enough savings to cover the upfront cost without straining your finances
- High loan amount: The larger the loan, the greater the potential savings from a rate reduction
- Tax considerations: Points may be tax-deductible in the year of purchase (consult a tax professional)
When to Avoid Mortgage Points
When Points May Not Make Sense
- Short-term ownership: You plan to sell or refinance before reaching the break-even point
- Tight cash situation: The upfront cost would deplete your emergency fund or down payment savings
- Uncertain future: Your job situation or life circumstances might require moving sooner than expected
- Planned refinancing: You anticipate refinancing in the near future if rates drop further
Using the Mortgage Points Calculator
How to Use the Calculator
- Enter your loan details: Input your loan amount, term, and current interest rate
- Specify points options: Enter how many points you're considering and the rate reduction per point
- Add closing costs: Include any other closing costs you'll pay
- Set your timeline: Specify how long you plan to stay in the home
- Calculate savings: Review the results to see if points make financial sense
The calculator will show you:
- The upfront cost of the points
- Your new interest rate after buying points
- Your monthly payment savings
- The break-even period (when savings equal the points cost)
- Total savings over your planned ownership period
Pro Tip: Negotiate Your Points
Don't assume the points offered are fixed. Some lenders may be willing to offer a better rate reduction per point, especially if you have excellent credit or are borrowing a large amount. Always shop around and negotiate.
Understanding the Key Metrics
Break-Even Analysis
The break-even point is the most critical calculation when considering mortgage points. This tells you how long you need to keep the mortgage for the points to pay for themselves.
Break-Even Formula
Break-Even Period (in months) = Cost of Points ÷ Monthly Payment Savings
Example Calculation
If points cost $3,000 and save you $50 per month, your break-even point is 60 months (5 years).
Decision Rule
If you'll own the home longer than the break-even period, points likely make financial sense. If not, you're better off keeping the cash.
Total Cost Comparison
Looking beyond the break-even point, it's important to calculate your total costs over your expected ownership period:
| Scenario | Upfront Costs | Monthly Payment | Total 5-Year Cost | Total 10-Year Cost | Total 30-Year Cost |
|---|---|---|---|---|---|
| No Points | $5,000 | $1,899 | $118,940 | $232,880 | $688,640 |
| 1 Point | $8,000 | $1,847 | $118,820 | $229,640 | $672,920 |
| 2 Points | $11,000 | $1,796 | $118,760 | $226,520 | $657,560 |
Note: Example based on $300,000 loan at 6.5% with 0.25% reduction per point
Real-World Scenarios
Scenario 1: The Long-Term Homeowner
Situation: Sarah is buying her "forever home" with a $400,000 mortgage at 6.5%. She plans to stay for 20+ years and has extra cash for closing costs.
Analysis: Buying 2 points ($8,000) reduces her rate to 6.0%, saving $126 per month. Break-even occurs at 63 months (just over 5 years).
Verdict: With a 20+ year timeline, points make excellent financial sense. She'll save over $25,000 in interest over the loan term.
Scenario 2: The Potential Relocator
Situation: Mark is transferred frequently for work and expects to move in 3-4 years. He's considering a $250,000 mortgage at 6.75%.
Analysis: Buying 1 point ($2,500) reduces his rate to 6.5%, saving $41 per month. Break-even occurs at 61 months (over 5 years).
Verdict: Since Mark plans to move before reaching the break-even point, points don't make financial sense. He should keep the $2,500.
Consider the Opportunity Cost
Before buying points, consider what else you could do with that money. Could you earn a higher return by investing it? Would it be better used for home improvements that increase property value? Or should it stay in your emergency fund for security?
Tax Implications of Mortgage Points
In many cases, mortgage points are tax-deductible, but the rules can be complex:
- Purchase mortgages: Points paid to purchase a primary residence are generally fully deductible in the year you pay them
- Refinances: Points paid when refinancing must be deducted over the life of the loan
- Investment properties: Different rules may apply for rental properties or second homes
Important: Tax laws change frequently. Always consult with a qualified tax professional about your specific situation.
Common Mortgage Points Mistakes
Avoid these pitfalls when considering mortgage points:
- Overestimating how long you'll stay: Life changes unexpectedly - be conservative in your estimates
- Not shopping around: Different lenders offer different point structures - compare options
- Ignoring closing costs: Remember to factor in all closing costs, not just the points
- Forgetting about refinancing: If rates drop significantly, you might refinance before reaching break-even
- Straining your cash reserves: Don't deplete your emergency fund to buy points
Frequently Asked Questions
Are mortgage points worth it?
Mortgage points are worth it if you plan to stay in your home longer than the break-even period. This typically ranges from 5-7 years, but varies based on your loan amount, interest rate, and points cost.
Can I buy fractional points?
Yes, many lenders allow you to purchase fractional points (e.g., 0.5 points). This can be a good option if you want some rate reduction but don't want to pay for a full point.
Do points affect my closing costs?
Yes, points increase your upfront closing costs. However, they may be tax-deductible, which can partially offset this cost.
Can I negotiate the rate reduction per point?
Sometimes. While 0.25% reduction per point is standard, some lenders may offer more favorable terms, especially for larger loans or borrowers with excellent credit.
What's the difference between discount points and origination points?
Discount points lower your interest rate, while origination points are fees lenders charge for processing your loan. Only discount points potentially save you money over time.
Should I buy points if I'm refinancing?
The same break-even analysis applies to refinances. If you plan to keep the refinanced loan long enough to pass the break-even point, points may make sense.