Understand the cost and savings associated with discount and origination points on your mortgage.
Mortgage Points Calculator
The total amount you are borrowing.
The APR without paying points.
Each point typically costs 1% of the loan amount.
How much the APR decreases for each point purchased.
15
20
25
30
35
The total duration of the loan.
Results Summary
$0.00
Cost of Points: $0.00
New Interest Rate: 0.00%
Monthly Savings: $0.00
Break-Even Period: 0 months
Total Interest Savings: $0.00
Key Assumptions
Loan Amount: $0.00
Original Rate: 0.00%
New Rate: 0.00%
Points Purchased: 0
Loan Term: 0 years
How it Works:
The total cost of points is calculated as a percentage of the loan amount. The new interest rate is determined by subtracting the rate reduction per point multiplied by the number of points from the original rate. Monthly payment difference is calculated using the standard mortgage payment formula (M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]), comparing payments at the old and new rates. The break-even point is the cost of points divided by the monthly savings. Total interest savings are calculated over the full loan term, assuming the loan is held for that entire period.
Monthly Payment vs. Total Interest Paid
Loan Amortization Comparison
Year
Original Monthly P&I
New Monthly P&I
Monthly Savings
Total Interest (Original)
Total Interest (New)
Interest Savings
What are Mortgage Points?
Mortgage points, often referred to as discount points or origination points, are fees paid directly to the lender at closing in exchange for a reduction in the interest rate. One point typically costs 1% of the loan amount, and it usually buys a reduction of 0.25% to 0.5% in the interest rate. Understanding mortgage points is crucial for anyone looking to optimize their home financing. When you consider buying a home or refinancing an existing mortgage, you'll likely encounter the option to pay points. These upfront costs can seem daunting, but they are designed to lower your long-term borrowing costs. It's essential to weigh the initial expense against the potential interest savings over the life of the loan. This calculator helps you quantify that decision. Many homeowners ponder whether paying mortgage points is a wise financial move. The answer often depends on how long you plan to stay in your home and your individual financial goals. If you intend to keep the mortgage for many years, buying points can lead to substantial savings. Conversely, if you plan to sell or refinance before the break-even point, paying points might not be beneficial. This guide will delve deep into the nuances of mortgage points, helping you decide if they are the right choice for your situation.
Who Should Consider Mortgage Points?
Homebuyers and refinancers who plan to keep their mortgage for an extended period (typically longer than the break-even period calculated) are the primary candidates for purchasing discount points. If you are comfortable with the upfront cost and have sufficient cash reserves for closing, buying points can be an effective strategy to lower your overall interest expense. Borrowers with a strong financial position and a desire to minimize long-term costs should investigate the benefits of mortgage points. It's also a strategy for those who anticipate interest rates rising significantly in the future and want to lock in a lower rate now.
Common Misconceptions About Mortgage Points
A common misconception is that all points are the same. There are two main types: discount points, which lower your interest rate, and origination points, which are essentially lender fees for processing the loan and don't necessarily reduce the rate. Another misconception is that buying points is always beneficial. If you sell your home or refinance before recouping the cost of the points through interest savings, you will have actually spent more money. It's vital to perform accurate calculations, like those this mortgage points calculator facilitates, to determine your personal break-even point. Not all lenders offer the same rate reduction per point, so shopping around is key.
Mortgage Points Formula and Mathematical Explanation
Calculating the financial impact of mortgage points involves understanding the cost, the resulting rate reduction, and the subsequent changes in monthly payments and total interest paid. The core of the calculation relies on the mortgage payment formula.
The Calculations Explained:
Cost of Points: This is a direct calculation based on the loan amount and the number of points being purchased.
New Interest Rate: This is the original rate adjusted by the rate reduction provided by each point.
Monthly Payment (Original & New): The standard mortgage payment formula is used for both the original and new interest rates.
Monthly Savings: The difference between the original and new monthly payments.
Break-Even Period (in Months): The time it takes for the accumulated monthly savings to equal the upfront cost of the points.
Total Interest Paid (Original & New): Calculated over the entire loan term using the respective monthly payments.
Total Interest Savings: The difference in total interest paid between the original and new loan scenarios.
The Mortgage Payment Formula:
The formula to calculate the monthly payment (M) for a loan is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where:
P = Principal loan amount
i = Monthly interest rate (Annual rate divided by 12)
n = Total number of payments (Loan term in years multiplied by 12)
Variables Table for Mortgage Points Calculation
Variable
Meaning
Unit
Typical Range
P (Loan Amount)
The principal amount of the mortgage.
Currency ($)
$50,000 – $5,000,000+
Current Annual Rate
The initial interest rate of the mortgage without points.
Percentage (%)
2% – 15%+
Points to Buy
The number of discount points purchased.
Count
0 – 5+
Rate Reduction per Point
The reduction in annual interest rate for each point bought.
Percentage (%)
0.125% – 0.5%
Loan Term (Years)
The total duration of the mortgage loan.
Years
15 – 30 (common)
i (Monthly Rate)
The monthly equivalent of the annual interest rate.
Decimal
(Annual Rate / 100) / 12
n (Number of Payments)
The total number of monthly payments over the loan term.
Count
(Loan Term * 12)
Cost of Points
The total upfront fee paid for buying points.
Currency ($)
(Loan Amount * Points to Buy * 0.01)
New Annual Rate
The reduced interest rate after purchasing points.
Percentage (%)
Current Rate – (Points to Buy * Rate Reduction per Point)
Monthly Savings
The reduction in the monthly mortgage payment.
Currency ($)
Calculated difference
Break-Even Months
Number of months to recoup point cost via savings.
Months
Cost of Points / Monthly Savings
Practical Examples (Real-World Use Cases)
Example 1: Long-Term Homeowner
Sarah is buying a home and has qualified for a 30-year fixed-rate mortgage of $400,000 at 7.5% interest. Her lender offers her the option to buy 2 discount points, and each point will reduce the interest rate by 0.25%. The rate reduction per point is 0.25%, meaning 2 points will lower her rate by 0.50%.
Loan Amount: $400,000
Current Rate: 7.5%
Points to Buy: 2
Rate Reduction per Point: 0.25%
Loan Term: 30 Years
Calculator Output:
Cost of Points: $8,000 (2 points * 1% of $400,000)
New Interest Rate: 7.0% (7.5% – (2 * 0.25%))
Original Monthly Payment (P&I): $2,797.39 (approx. on 7.5%)
New Monthly Payment (P&I): $2,671.21 (approx. on 7.0%)
Monthly Savings: $126.18 ($2,797.39 – $2,671.21)
Break-Even Period: Approximately 63 months (6.3 years) ($8,000 / $126.18)
Total Interest Savings: $17,877.28 (over 30 years)
Financial Interpretation: Sarah is planning to live in this home for at least 10 years. Since her break-even period is about 6.3 years, buying the 2 points is a sound financial decision. Over the remaining 23.7 years of her loan, she will save significantly on interest, accumulating over $17,000 in savings.
Example 2: Refinancing with Shorter Horizon
David is refinancing his existing mortgage. He has a balance of $250,000 and a current rate of 8.0% on a 30-year term. His lender offers him the option to pay 1 point to lower the rate to 7.75%. The rate reduction per point is 0.25%.
Loan Amount: $250,000
Current Rate: 8.0%
Points to Buy: 1
Rate Reduction per Point: 0.25%
Loan Term: 30 Years
Calculator Output:
Cost of Points: $2,500 (1 point * 1% of $250,000)
New Interest Rate: 7.75% (8.0% – (1 * 0.25%))
Original Monthly Payment (P&I): $1,834.09 (approx. on 8.0%)
New Monthly Payment (P&I): $1,796.68 (approx. on 7.75%)
Financial Interpretation: David is considering selling his home in about 4 years. Since his break-even period is approximately 5.6 years, paying the 1 point is likely not a financially sound decision for him. He would spend $2,500 upfront and wouldn't recoup that cost through savings until after he has already moved. In this scenario, it would be better for David to avoid paying points and accept the higher interest rate. This highlights how critical the loan term assumption is when deciding on mortgage points.
How to Use This Mortgage Points Calculator
Our Mortgage Points Calculator is designed to be intuitive and straightforward. Follow these steps to get accurate insights into whether purchasing mortgage points is right for you:
Enter Loan Amount: Input the total amount you plan to borrow.
Input Current Interest Rate: Enter the annual interest rate (APR) you qualify for without paying any points.
Specify Points to Buy: Enter the number of discount points you are considering purchasing. Remember, one point typically costs 1% of the loan amount.
Define Rate Reduction per Point: Input how much the lender reduces the annual interest rate for each point purchased. This is a crucial variable often negotiated or provided by the lender.
Select Loan Term: Choose the duration of your mortgage in years from the dropdown menu.
Click "Calculate": The calculator will instantly process your inputs.
Reading the Results
The calculator provides several key outputs:
Primary Highlighted Result: This shows the **Total Interest Savings** over the life of the loan if held to term, giving you a clear picture of the long-term financial benefit.
Cost of Points: The total upfront fee you will pay to purchase the specified number of points.
New Interest Rate: The reduced annual interest rate after buying the points.
Monthly Savings: The difference in your principal and interest (P&I) payment each month compared to the original rate.
Break-Even Period: The number of months it will take for your monthly savings to offset the upfront cost of the points. This is a critical figure for decision-making.
Key Assumptions: A summary of the inputs used in the calculation for clarity.
Decision-Making Guidance
The most important factor is the **Break-Even Period**. Compare this to how long you realistically expect to keep the mortgage.
If the break-even period is shorter than your planned time in the home, purchasing points is likely a good financial move.
If the break-even period is longer than your planned time, you will likely not recoup the cost, and it might be better to avoid paying points.
Always consider your cash flow. Can you comfortably afford the upfront cost of points in addition to other closing costs?
Shop around! Lenders offer different rate reduction percentages per point. Getting quotes from multiple lenders can help you find the best deal. This calculator helps you analyze the offers you receive.
Key Factors That Affect Mortgage Points Results
Several variables significantly influence the outcome of paying mortgage points. Understanding these factors is key to making an informed decision:
Loan Amount: A larger loan amount means a higher cost for each point purchased, but it also means larger potential monthly savings and total interest savings, making the break-even period potentially shorter.
Interest Rate Spread (Rate Reduction per Point): The effectiveness of points is directly tied to how much they reduce your interest rate. A larger reduction per point makes buying points more attractive. If a point only shaves off 0.125%, it's less impactful than one that shaves off 0.5%.
Current Interest Rate Environment: If current rates are high, the benefit of lowering the rate through points is more pronounced, leading to greater monthly savings and total interest reduction. Conversely, in a low-rate environment, the impact of points might be less significant.
Loan Term: Longer loan terms magnify the impact of interest rate changes. Savings accumulate over more payments, making points more beneficial for longer terms (like 30 years) compared to shorter terms, assuming the homeowner stays in the property long enough.
Time Horizon (How Long You Stay in the Home): This is arguably the most critical factor. If you sell or refinance before the break-even point, you lose money. If you stay long after, you save significantly. This calculator's break-even metric directly addresses this.
Opportunity Cost: The money spent on points could be invested elsewhere. You must consider if the return from buying points (interest savings) is better than the potential return from investing that money in stocks, bonds, or other ventures.
Lender Fees & Closing Costs: Points are part of closing costs. Ensure you factor in the total closing costs, including points, appraisal fees, title insurance, etc., when assessing affordability and overall value. High closing costs might make paying points less appealing.
Future Interest Rate Predictions: If you anticipate rates will rise significantly, locking in a lower rate now by paying points could be a strategic move. If rates are expected to fall, it might be wiser to wait and refinance later without paying points upfront.
Frequently Asked Questions (FAQ) about Mortgage Points
What is the difference between discount points and origination points?
Discount points are paid to reduce your interest rate. Origination points are fees paid to the lender for processing the loan, and they don't necessarily reduce the interest rate. Our calculator focuses on discount points.
Are mortgage points tax-deductible?
In many cases, discount points paid on your primary home mortgage are tax-deductible in the year you pay them, provided certain conditions are met (e.g., the loan is for your primary residence, points are customary for the area, the points don't exceed 1% of the total loan amount). Consult a tax professional for personalized advice.
How many points can I buy on a mortgage?
There's typically no strict limit imposed by law, but lenders may have their own policies. It's uncommon to buy more than 3-4 points, as the rate reduction may diminish significantly, and the cost becomes prohibitive.
What if I pay points on a second home or investment property?
Points paid on second homes or investment properties are generally not deductible in the year they are paid. They are typically amortized (deducted gradually) over the life of the loan. Again, consult a tax advisor.
Is it always better to buy points if I plan to stay long-term?
Not necessarily. While long-term ownership favors buying points, you must still consider the opportunity cost of that money and whether the savings outweigh potential returns elsewhere. Always calculate the break-even point.
How does paying points affect my closing costs?
Paying points directly increases your upfront closing costs. You need to ensure you have enough cash available to cover these costs in addition to other standard closing expenses like appraisal fees, title insurance, and lender fees.
What happens if I refinance after buying points?
If you refinance before you have recouped the cost of the points through interest savings, you will have effectively lost money on the points. The upfront cost is gone, and the benefits may not have fully materialized.
Can I negotiate the cost or rate reduction of mortgage points?
Yes, points and their associated rate reductions are often negotiable, especially in competitive markets or when dealing with different lenders. Always shop around and compare offers. The data from this mortgage points calculator can empower your negotiations.