Mortgage Points Calculator
| Metric | Without Points | With Points | Difference |
|---|---|---|---|
| Interest Rate | - | - | - |
| Monthly Payment | - | - | - |
| Total Interest Paid | - | - | - |
| Total Cost Over X Years | - | - | - |
| Date | Loan Amount | Points | Break-Even | Savings | Currency | Actions |
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Mortgage Points Explained: Should You Buy Them?
Complete Guide to Understanding Mortgage Points with Calculator & Real Examples
Imagine you're buying a house and your lender offers you a deal: "Pay a little extra upfront, and we'll lower your interest rate for the entire loan." Should you take it? That's the question mortgage points answer!
This guide will walk you through everything about mortgage points in simple language, with real examples and our easy-to-use calculator that does all the math for you.
What Are Mortgage Points? (Simple Explanation)
Think of it this way:
Mortgage points are like buying a "discount coupon" for your interest rate. You pay extra money now (usually 1% of your loan amount) to get a lower interest rate forever.
Simple Formula: 1 Point = 1% of your loan amount = Typically 0.25% lower interest rate
Mortgage points have two official names:
- Discount Points: These lower your interest rate (what we're talking about here)
- Origination Points: These are fees lenders charge for processing your loan (different thing)
Try Our Mortgage Points Calculator
Not sure if points make sense for you? Our calculator does all the math instantly and tells you exactly when you'll break even.
Real Example: How Points Work
Example: The $300,000 Home
Sarah is buying a $300,000 house with a 30-year mortgage at 6.5% interest. Her lender offers:
- Option 1: 6.5% rate, no points
- Option 2: Buy 1 point for $3,000 (1% of $300,000), get 6.25% rate
| Scenario | Upfront Cost | Interest Rate | Monthly Payment | Monthly Savings |
|---|---|---|---|---|
| Without Points | $0 | 6.50% | $1,896 | – |
| With 1 Point | $3,000 | 6.25% | $1,847 | $49/month |
Break-Even Calculation: $3,000 ÷ $49 = 61 months (about 5 years)
If Sarah stays in the home longer than 5 years, she saves money. If she moves sooner, she loses money.
The Key Formula You Need to Know
The Most Important Calculation:
This tells you how many months it takes to "break even" – when your monthly savings equal what you paid upfront.
Understanding Each Part:
1. Cost of Points
This is simple math: Each point costs 1% of your loan amount.
Example: $300,000 loan × 1% = $3,000 per point
2. Monthly Savings
This depends on:
- Your loan amount
- How much the rate drops per point (usually 0.125% to 0.375%)
- Your loan term (15, 20, or 30 years)
3. Break-Even Period
This is where our calculator shines! It automatically calculates:
Pro Tip: Consider All Costs
When calculating break-even, include ALL closing costs in your "upfront cost" calculation. Our calculator has a field for "Other Closing Costs" to make this easy.
Should You Buy Points? Decision Guide
When Points MAKE SENSE:
- You'll stay in the home long-term (longer than break-even period)
- You have extra cash and want lower monthly payments
- You want predictable payments and don't plan to refinance
- Interest rates are low and unlikely to drop further
When to AVOID Points:
- You might move soon (before break-even)
- You're short on cash for closing costs
- You might refinance soon (points don't transfer)
- You need that money for renovations or emergencies
Common Point Scenarios Explained
| Situation | Loan Amount | Points | Cost | Rate Drop | Break-Even | Verdict |
|---|---|---|---|---|---|---|
| First-time homebuyer | $250,000 | 1 point | $2,500 | 0.25% | 5.5 years | ✅ Good if staying 7+ years |
| Military family (frequent moves) | $350,000 | 2 points | $7,000 | 0.5% | 7 years | ❌ Probably not worth it |
| Retirement home | $400,000 | 1.5 points | $6,000 | 0.375% | 4 years | ✅ Excellent choice |
| House flipper | $200,000 | 1 point | $2,000 | 0.25% | 5 years | ❌ Terrible idea |
Tax Considerations
Good news: Mortgage points are usually tax-deductible, but there are rules:
- Purchase loans: Points are deductible in the year you pay them
- Refinance loans: Points are deducted gradually over the loan term
- Must meet IRS rules: Points must be a percentage of loan amount, clearly shown on settlement statement, within normal range for your area
Tax Tip
Always consult a tax professional about your specific situation. Points on rental properties have different rules than primary residences.
Points vs. Other Options
Points vs. Higher Down Payment
Points lower your interest rate. Higher down payment lowers your loan amount. Which is better? Usually points if you'll stay long-term, down payment if you might move soon.
Points vs. Paying Mortgage Insurance
If you have less than 20% down, you'll pay PMI. Sometimes buying points to get a better rate plus paying PMI still beats a higher rate with no PMI. Our calculator can help compare!
Points vs. Investing the Money
That $3,000 for points could be invested instead. Compare the guaranteed return from points (your interest savings) with potential investment returns.
Frequently Asked Questions (15 Common Questions)
Key Takeaways
- Points are prepaid interest – you pay now to pay less later
- The break-even calculation is crucial – know how long until you start saving
- Consider your timeline – points only make sense if you'll stay beyond break-even
- Shop around – different lenders offer different point values
- Don't forget taxes – points are usually deductible
Final Advice:
Mortgage points are a mathematical decision, not an emotional one. Use our calculator, be honest about how long you'll stay in the home, and make the choice that makes financial sense for YOUR situation.