Mortgage Points Break-Even Calculator
Determine if "buying down the rate" is a smart financial move for your home loan.
Analysis Results
Monthly Payment (Original):
Monthly Payment (Discounted):
Monthly Savings:
Break-Even Time:
Total 30-Year Savings:
Understanding Mortgage Discount Points
Mortgage points, also known as discount points, are a form of prepaid interest. By paying a lump sum at closing, you "buy down" the interest rate on your mortgage, which results in lower monthly payments over the life of the loan. Typically, one point costs 1% of the total loan amount and reduces the interest rate by approximately 0.25%.
The Golden Rule: Buying points only makes sense if you plan to stay in the home longer than it takes to "break even" on the upfront cost.
How to Calculate Your Break-Even Point
The calculation involves three main steps:
- Calculate Monthly Savings: Find the difference between your monthly mortgage payment at the original rate and the new discounted rate.
- Upfront Cost: Determine the total cash paid for the points at the time of closing.
- The Division: Divide the total cost of the points by the monthly savings. The result is the number of months required to recoup your investment.
Realistic Example
Suppose you are taking out a $400,000 mortgage. The lender offers you a 7.0% interest rate, or you can pay $4,000 (1 point) to reduce the rate to 6.75%.
- Monthly payment at 7.0%: $2,661.21
- Monthly payment at 6.75%: $2,594.41
- Monthly savings: $66.80
- $4,000 / $66.80 = 59.8 months
In this scenario, if you plan to sell the house or refinance in less than 5 years (60 months), paying for the point would result in a net loss. However, if you keep the loan for 30 years, you would save over $20,000 in interest.
Factors to Consider
While the math is straightforward, consider these variables before committing:
- Opportunity Cost: Could that $3,000 or $5,000 earn more if invested in the stock market?
- Tax Deductions: In many cases, mortgage points are tax-deductible in the year they are paid, which may lower your effective cost.
- Future Refinancing: If interest rates drop significantly in 2 years and you refinance, the money spent on points is essentially lost because the loan was paid off before the break-even point.