function calculateRateBuydown() {
// Retrieve inputs
var loanAmount = parseFloat(document.getElementById('bd_loan_amt').value);
var years = parseFloat(document.getElementById('bd_term_years').value);
var baseRate = parseFloat(document.getElementById('bd_base_rate').value);
var newRate = parseFloat(document.getElementById('bd_new_rate').value);
var costOfPoints = parseFloat(document.getElementById('bd_points_cost').value);
// Validation
if (isNaN(loanAmount) || isNaN(years) || isNaN(baseRate) || isNaN(newRate) || isNaN(costOfPoints)) {
alert("Please enter valid numbers in all fields.");
return;
}
if (newRate >= baseRate) {
alert("The Target Bought-Down Rate must be lower than the Current Market Rate to calculate savings.");
return;
}
// Calculate Monthly Payments
// Formula: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1 ]
var n = years * 12;
// Base Payment
var iBase = (baseRate / 100) / 12;
var pmtBase = (loanAmount * iBase * Math.pow(1 + iBase, n)) / (Math.pow(1 + iBase, n) – 1);
// New Payment
var iNew = (newRate / 100) / 12;
var pmtNew = (loanAmount * iNew * Math.pow(1 + iNew, n)) / (Math.pow(1 + iNew, n) – 1);
// Savings Calculation
var monthlySavings = pmtBase – pmtNew;
// Breakeven Calculation
// Months = Total Cost / Monthly Savings
var breakevenMonths = costOfPoints / monthlySavings;
var breakevenYears = breakevenMonths / 12;
// Display Results
document.getElementById('res_std_pmt').innerText = "$" + pmtBase.toFixed(2);
document.getElementById('res_new_pmt').innerText = "$" + pmtNew.toFixed(2);
document.getElementById('res_savings').innerText = "$" + monthlySavings.toFixed(2);
document.getElementById('res_breakeven').innerText = Math.ceil(breakevenMonths) + " Months";
document.getElementById('res_years_text').innerText = breakevenYears.toFixed(1);
// Show result div
document.getElementById('bd_results_area').style.display = 'block';
}
How to Calculate Rate Buydown and Breakeven Points
A rate buydown is a financial strategy used in real estate financing where the borrower pays an upfront fee—known as "discount points"—to lower the interest rate on their mortgage for the duration of the loan (permanent buydown) or a specific period (temporary buydown). Understanding how to calculate the cost versus the benefit is crucial for determining if this strategy will save you money in the long run.
The Logic Behind the Buydown Calculation
The core calculation for a rate buydown is a "Breakeven Analysis." This determines how long you must live in the home (or keep the mortgage) before the monthly savings outweigh the upfront cash you paid to get the lower rate.
The formula consists of three main variables:
Upfront Cost: This is the fee paid at closing to buy the points. Typically, one point costs 1% of the loan amount and lowers the rate by approximately 0.25%, though this varies by lender.
Monthly Savings: The difference between the mortgage payment at the standard market rate and the payment at the bought-down rate.
Recoup Period: The time required to earn back the upfront cost.
Step-by-Step Calculation Guide
To manually calculate your rate buydown effectiveness, follow these steps (which our calculator above performs automatically):
Calculate Base Payment: Determine your principal and interest payment using the current market rate without points.
Calculate New Payment: Determine the payment using the lower, bought-down rate.
Find the Savings: Subtract the new payment from the base payment to find your monthly savings.
Determine Breakeven: Divide the Total Cost of Points by the Monthly Savings.
Example:
If the points cost you $4,000 upfront and you save $100 per month on your mortgage payment, your breakeven point is 40 months ($4,000 ÷ $100). If you plan to sell the home or refinance before 40 months have passed, the buydown would result in a net financial loss.
Permanent vs. Temporary Buydowns
It is important to distinguish between the two types of buydowns when calculating costs:
Permanent Buydown: You pay points to lower the rate for the entire life of the loan (e.g., 30 years). The calculator above is designed for this scenario.
Temporary Buydown (e.g., 2-1 Buydown): The rate is lowered by 2% the first year and 1% the second year, before returning to the note rate. The cost for this is usually held in an escrow account and subsidizes the payment.
When is a Rate Buydown Worth It?
Calculating the rate buydown is only the first step. You should consider purchasing points if:
You plan to stay in the home longer than the breakeven period calculated above.
You do not expect interest rates to drop significantly in the near future (which would allow you to refinance for free).
You have excess cash reserves at closing and want to minimize monthly overhead.