About the Mortgage Points
Lenders often offer a trade: pay some cash upfront today in exchange for a lower interest rate for the life of the loan. Should you take that deal? Our Mortgage Points Calculator answers that with a specific number - the break-even point in months.
How It Works
The calculator prices out your discount points as a percentage of the loan amount, applies the resulting rate reduction to find your new interest rate, and compares the monthly payment with and without points. Dividing the upfront cost of points by the monthly savings tells you exactly how many months it takes before the lower rate pays for itself.
Formula & Methodology
One discount point traditionally costs 1% of the loan amount and commonly buys a 0.25 percentage point reduction in your interest rate, though the actual reduction varies by lender and market conditions - this calculator lets you adjust that assumption. It computes the standard amortized monthly payment twice, once at your quoted rate and once at the reduced rate after points, using the same present-value-of-an-annuity formula behind every fixed-rate loan. The difference between those two payments is your monthly savings, and dividing the points cost by that monthly savings gives the exact month you cross from net cost into net savings.
Step-by-Step: Calculating It By Hand
- 1Multiply the number of points by 1% of the loan amount to find the upfront cost.
- 2Multiply the number of points by the rate reduction per point, then subtract that from your quoted rate to find the new rate.
- 3Calculate the monthly payment at the original rate and at the new, reduced rate using the standard amortization formula.
- 4Subtract the new payment from the original payment to find the monthly savings.
- 5Divide the cost of points by the monthly savings to find the break-even point in months.
Examples
Two points on a 30-year loan
A $350,000 loan at 7% costs $7,000 for 2 points, reducing the rate to 6.5% and saving roughly $121/month - a break-even point of about 58 months, or just under 5 years.
Staying put long-term
A buyer planning to stay in the home for 15+ years comes out well ahead buying points, since the monthly savings keep accumulating for years past the break-even month.
Advantages
- Converts an abstract rate discount into a concrete break-even timeline
- Lets you test different point amounts to see which makes financial sense
- Accounts for your actual loan amount and term instead of generic rules of thumb
- Makes it easy to compare against how long you actually expect to keep the loan
Common Mistakes
- Buying points without a realistic estimate of how long you'll keep the loan or stay in the home
- Assuming every lender offers the same 0.25% reduction per point
- Ignoring that paying cash for points reduces funds available for a larger down payment or closing costs
- Not comparing the break-even period against your own plans to refinance or move
Edge Cases to Watch For
- If the rate reduction per point is small or your loan term is short, monthly savings may never fully offset the upfront points cost within a reasonable time frame.
- Rate reduction per point isn't fixed at 0.25% industry-wide - it can range from roughly 0.125% to 0.375% depending on the lender and market, so always confirm your actual loan estimate figure.
- Points paid on a purchase mortgage are often tax-deductible in the year paid, which effectively lowers their real cost and shortens the break-even period, though this calculator doesn't model tax effects.
- If you plan to refinance or sell before the break-even month, paying for points typically loses money even though the lower rate looks appealing on paper.
Common Use Cases
- Deciding whether to buy discount points on a new mortgage
- Comparing loan offers that differ in points versus rate
- Estimating how long you'd need to stay in a home to benefit from points
- Negotiating with a lender using a clear break-even number instead of a gut feeling