Using the Dots Calculator
The dots calculator is a specialized financial tool designed to help homebuyers and homeowners understand the impact of "mortgage points" or "dots" on their total loan cost. In the mortgage industry, one dot (or point) is equal to 1% of your total loan amount. By paying for dots upfront, you are essentially "buying down" your interest rate to secure a lower monthly payment.
This tool allows you to perform two critical calculations: determining the raw cost of the points and performing a break-even analysis to see if the upfront investment is worth the long-term savings.
- Loan Amount
- The total principal amount you are borrowing from the lender.
- Number of Dots (Points)
- The quantity of discount points you are purchasing. For example, 1.5 dots equals 1.5% of the loan.
- Current Interest Rate
- The standard market interest rate being offered without buying points.
- New Interest Rate
- The discounted rate promised by the lender after the dots are applied.
How It Works
When you utilize the dots calculator, it applies the standard financial formulas used by mortgage lenders. The primary calculation for the cost of points is straightforward:
Cost of Dots = Loan Amount × (Number of Dots / 100)
To determine if buying dots is a smart move, the calculator also computes the "Break-Even Point." This is the moment in time when your monthly savings on interest finally equal the amount you paid upfront for the dots. The logic follows these steps:
- Calculate the original monthly mortgage payment.
- Calculate the new monthly mortgage payment with the reduced rate.
- Subtract the new payment from the old payment to find the monthly savings.
- Divide the total cost of dots by the monthly savings to find the number of months required to break even.
Dots Calculation Example
Example: You are taking out a $400,000 mortgage. Your lender offers you a 7.5% interest rate. However, they tell you that you can buy 2 "dots" (points) to lower your interest rate to 7.0%.
Step-by-step solution:
- Loan Amount: $400,000
- Cost of Dots: 2% of $400,000 = $8,000
- Original Monthly Payment (7.5%): $2,796.86
- New Monthly Payment (7.0%): $2,661.21
- Monthly Savings: $2,796.86 – $2,661.21 = $135.65
- Break-Even Calculation: $8,000 / $135.65 = 58.97 months
In this scenario, it would take approximately 4.9 years of living in the home to recoup the $8,000 you paid at closing. If you plan to stay in the home for 10 or 20 years, buying these dots is a highly profitable financial decision.
Common Questions
Are mortgage dots tax-deductible?
In many cases, discount points (dots) are considered prepaid interest and may be tax-deductible if you itemize your deductions. However, tax laws change frequently, and the rules differ between home purchases and refinances. Always consult with a tax professional regarding your specific situation.
How much does 1 dot usually lower my rate?
While it varies by lender and market conditions, one dot typically lowers your interest rate by about 0.25% (25 basis points). Our dots calculator allows you to input the specific reduction your lender is offering, as some might offer more or less than the standard quarter-point.
When is buying dots a bad idea?
Buying dots is generally a poor idea if you plan to sell the home or refinance the mortgage before you reach the break-even point. If your dots calculator result shows a 5-year break-even, but you plan to move in 3 years, you will lose money on the transaction.
Is "Dots" the same as "Origination Points"?
No. Discount points (dots) are used to lower your rate. Origination points are fees charged by the lender to cover the costs of processing the loan. Origination points do not lower your interest rate, though they are also calculated as a percentage of the loan amount.