A mortgage rate buydown is a financial strategy where a borrower pays an upfront fee, often called "discount points," to secure a lower interest rate on their loan. This calculator helps determine whether purchasing these points makes financial sense by calculating the "breakeven point"—the exact moment when your monthly savings outweigh the upfront cost.
Understanding the Buydown Formula
To manually calculate a rate buydown, you must compare two scenarios: your loan at the base rate (par rate) and your loan at the lower rate. The core formula involves finding the difference in Principal and Interest (P&I) payments.
The Breakeven Formula:
Breakeven (Months) = Upfront Cost of Points ÷ Monthly Savings
Step-by-Step Calculation Logic
Determine the Base Payment: Calculate the monthly P&I using the standard amortization formula with your original quoted rate.
Determine the New Payment: Calculate the monthly P&I using the lower, bought-down interest rate.
Find Monthly Savings: Subtract the New Payment from the Base Payment.
Calculate Breakeven: Divide the total cash required to buy the points by the Monthly Savings.
In this example, if you plan to stay in the home and keep the mortgage for more than 2.5 years, buying down the rate is financially beneficial. If you plan to sell or refinance in 2 years, you would lose money on the buydown.
Factors Affecting Your Decision
While the math provides a clear timeline, several external factors should influence your decision to buy down a rate:
Duration of Ownership: The longer you hold the loan, the more you save.
Refinance Environment: If rates are expected to drop significantly in the near future, paying for a permanent buydown now might be wasted money if you refinance shortly after.
Cash Reserves: Consider if the upfront cash used for points could earn a higher return if invested elsewhere or kept as an emergency fund.
function calculateBuydown() {
// 1. Get Inputs
var principal = parseFloat(document.getElementById('principalAmount').value);
var years = parseFloat(document.getElementById('amortizationYears').value);
var baseRate = parseFloat(document.getElementById('baseNoteRate').value);
var targetRate = parseFloat(document.getElementById('targetRate').value);
var cost = parseFloat(document.getElementById('buydownCost').value);
// 2. Validate Inputs
if (isNaN(principal) || principal <= 0 ||
isNaN(years) || years <= 0 ||
isNaN(baseRate) || baseRate < 0 ||
isNaN(targetRate) || targetRate < 0 ||
isNaN(cost) || cost = baseRate) {
alert("The Target Rate must be lower than the Base Note Rate to calculate savings.");
return;
}
// 3. Perform Calculations
var n = years * 12; // Total number of payments
var monthlyBaseRate = baseRate / 100 / 12;
var monthlyTargetRate = targetRate / 100 / 12;
// Amortization Formula: P * (r(1+r)^n) / ((1+r)^n – 1)
var basePayment = 0;
var newPayment = 0;
// Handle case where rate is 0 (unlikely but possible mathematically)
if (baseRate === 0) {
basePayment = principal / n;
} else {
basePayment = (principal * monthlyBaseRate * Math.pow(1 + monthlyBaseRate, n)) / (Math.pow(1 + monthlyBaseRate, n) – 1);
}
if (targetRate === 0) {
newPayment = principal / n;
} else {
newPayment = (principal * monthlyTargetRate * Math.pow(1 + monthlyTargetRate, n)) / (Math.pow(1 + monthlyTargetRate, n) – 1);
}
var monthlySavings = basePayment – newPayment;
var breakevenMonths = cost / monthlySavings;
var breakevenYears = breakevenMonths / 12;
var fiveYearSavings = (monthlySavings * 60) – cost;
// 4. Format and Display Results
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
minimumFractionDigits: 2,
maximumFractionDigits: 2
});
document.getElementById('displayBasePayment').innerHTML = formatter.format(basePayment);
document.getElementById('displayNewPayment').innerHTML = formatter.format(newPayment);
document.getElementById('displaySavings').innerHTML = formatter.format(monthlySavings);
// 5-Year Savings Logic (Show positive savings or net loss)
if (fiveYearSavings >= 0) {
document.getElementById('display5YearSavings').innerHTML = formatter.format(fiveYearSavings) + " (Net Gain)";
document.getElementById('display5YearSavings').style.color = "green";
} else {
document.getElementById('display5YearSavings').innerHTML = formatter.format(fiveYearSavings) + " (Net Loss)";
document.getElementById('display5YearSavings').style.color = "red";
}
// Breakeven display logic
if (monthlySavings > 0) {
var yearsInt = Math.floor(breakevenYears);
var monthsInt = Math.ceil(breakevenMonths % 12);
// Adjust if months is 12
if (monthsInt === 12) {
yearsInt++;
monthsInt = 0;
}
var timeString = "";
if (yearsInt > 0) timeString += yearsInt + " Year" + (yearsInt > 1 ? "s" : "") + " ";
if (monthsInt > 0) timeString += monthsInt + " Month" + (monthsInt > 1 ? "s" : "");
if (yearsInt === 0 && monthsInt === 0) timeString = "Immediate";
document.getElementById('displayBreakeven').innerHTML = timeString + " (" + breakevenMonths.toFixed(1) + " Total Months)";
} else {
document.getElementById('displayBreakeven').innerHTML = "No Savings";
}
// Show result container
document.getElementById('result').style.display = 'block';
}