Enter your loan details above to calculate the break-even point.
Understanding Mortgage Points and Break-Even Analysis
When you take out a mortgage, you often have the option to pay "points" upfront. A point is a fee, equal to 1% of the loan amount, that you pay directly to the lender at closing in exchange for a reduced interest rate. This calculator helps you determine how long you need to stay in your home (or keep your mortgage) to recoup the upfront cost of these points through interest savings.
What are Mortgage Points?
Discount Points: These are the most common type. You pay them to lower your interest rate for the life of the loan. One discount point typically lowers the interest rate by 0.25% to 1%.
Origination Points: These are fees charged by the lender for processing the loan and are generally not tax-deductible. This calculator focuses on discount points.
How the Calculation Works
The break-even point is the amount of time (in months or years) it takes for the total interest saved from paying points to equal the upfront cost of buying those points.
Here's the breakdown of the calculation:
1. Total Cost of Points
This is the initial amount you pay upfront to reduce your interest rate.
Total Cost of Points = Number of Points * Cost Per Point
2. Total Interest Rate Reduction
This is the combined reduction in your annual interest rate from buying the specified number of points.
Total Rate Reduction (%) = Number of Points * Interest Rate Reduction Per Point (%)
3. New Interest Rate
This is your interest rate after applying the reduction.
New Interest Rate (%) = Current Interest Rate (%) - Total Rate Reduction (%)
4. Monthly Interest Savings
This is the difference in the monthly interest paid between the original loan and the loan with the reduced rate.
To calculate this precisely, we need to consider the monthly payment and the interest portion of that payment. A simplified approach uses the difference in interest paid annually:
For a more precise calculation using monthly payments:
The monthly payment for a loan is calculated using the formula:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where:
M = Monthly Payment
P = Principal Loan Amount
i = Monthly Interest Rate (Annual Rate / 12)
n = Total Number of Payments (Loan Term in Years * 12)
The calculator calculates the monthly interest saved by determining the interest paid in the first month for both loan scenarios and finding the difference. This provides a very close approximation of the ongoing monthly savings.
5. Break-Even Point (in Months)
This is the core of the analysis: how long it takes for the savings to cover the cost.
Break-Even Point (Months) = Total Cost of Points / Monthly Interest Savings
6. Break-Even Point (in Years)
Converts the monthly break-even point into years for easier understanding.
Break-Even Point (Years) = Break-Even Point (Months) / 12
When Should You Buy Points?
Buying points makes financial sense if you plan to stay in your home and keep your mortgage for longer than the break-even period. If you anticipate selling your home or refinancing before reaching the break-even point, paying points might cost you more in the long run.
Short-term Homeowners: May not benefit from points as they won't recoup the upfront cost.
Long-term Homeowners: Can significantly benefit from reduced payments over many years.
Anticipating Refinance: If you plan to refinance soon, evaluate if the savings before refinancing outweigh the cost.
This calculator provides a crucial tool for making informed decisions about your mortgage financing.
function calculateBreakEven() {
var loanAmount = parseFloat(document.getElementById("loanAmount").value);
var currentInterestRate = parseFloat(document.getElementById("currentInterestRate").value);
var pointsCost = parseFloat(document.getElementById("pointsCost").value);
var pointsToBuy = parseFloat(document.getElementById("pointsToBuy").value);
var pointsInterestReduction = parseFloat(document.getElementById("pointsInterestReduction").value);
var resultDiv = document.getElementById("result");
// Input validation
if (isNaN(loanAmount) || loanAmount <= 0 ||
isNaN(currentInterestRate) || currentInterestRate <= 0 ||
isNaN(pointsCost) || pointsCost < 0 || // Cost can be 0 if points are free
isNaN(pointsToBuy) || pointsToBuy < 0 || // Can buy 0 points
isNaN(pointsInterestReduction) || pointsInterestReduction < 0) {
resultDiv.innerHTML = 'Please enter valid positive numbers for all fields.';
resultDiv.style.backgroundColor = "#ffc107"; // Warning yellow
return;
}
// Calculate total cost of points
var totalCostOfPoints = pointsToBuy * pointsCost;
// Calculate new interest rate
var totalRateReduction = pointsToBuy * pointsInterestReduction;
var newInterestRate = currentInterestRate – totalRateReduction;
// Ensure new interest rate doesn't go below zero (or a reasonable minimum)
if (newInterestRate < 0) {
newInterestRate = 0; // Or handle as an error/warning if desired
}
// Calculate monthly interest savings – using a more accurate monthly payment approach
var monthlyInterestRateCurrent = currentInterestRate / 100 / 12;
var monthlyInterestRateNew = newInterestRate / 100 / 12;
// Assuming a standard 30-year mortgage for calculation purposes if term isn't provided.
// A fixed term is needed for the M = P[i(1+i)^n]/[(1+i)^n-1] formula.
// If no term is given, we can approximate savings based on principal and rate difference.
// For simplicity and focus on break-even *rate savings*, let's calculate monthly interest directly.
// This assumes the principal remains the same for a short period comparison or that
// we are comparing the *interest portion* of the payment which changes directly with the rate.
var monthlyInterestCurrent = loanAmount * monthlyInterestRateCurrent;
var monthlyInterestNew = loanAmount * monthlyInterestRateNew;
var monthlyInterestSavings = monthlyInterestCurrent – monthlyInterestNew;
// Handle case where savings are negligible or zero
if (monthlyInterestSavings <= 0.01) { // Use a small threshold to avoid division by zero/very small numbers
resultDiv.innerHTML = 'Interest savings are too small to calculate a meaningful break-even point with these inputs.';
resultDiv.style.backgroundColor = "#ffc107"; // Warning yellow
return;
}
// Calculate break-even point in months
var breakEvenMonths = totalCostOfPoints / monthlyInterestSavings;
// Calculate break-even point in years
var breakEvenYears = breakEvenMonths / 12;
// Display results
resultDiv.innerHTML =
'Total Cost of Points: $' + totalCostOfPoints.toFixed(2) + '' +
'New Interest Rate: ' + newInterestRate.toFixed(3) + '%' +
'Monthly Interest Savings: $' + monthlyInterestSavings.toFixed(2) + '' +
'Break-Even Point: ' + breakEvenMonths.toFixed(1) + ' months' +
'Break-Even Point: ' + breakEvenYears.toFixed(1) + ' years';
resultDiv.style.backgroundColor = "var(–success-green)"; // Reset to success green
}