Mortgage Points Calculator
A point costs one per cent of the loan and buys a lower rate for the life of it. Whether that is worth doing comes down to one question: how long are you keeping the loan?
Break-even
62months
- Points cost
- $3,000.00
- Rate becomes
- 6.250%
- Payment without
- $1,896.20
- Payment with
- $1,847.15
- Saved each month
- $49.05
- Interest saved
- $17,658.89
- You are ahead from month 62. Before that the points have cost more than they have saved, so this only pays if you keep the loan past then.
- A point is one per cent of the loan, paid at closing. What it buys varies by lender and by day — a quarter point of rate per point is common but not a rule, so use the figure you have been quoted.
- Points are usually a poor buy if you might move or refinance within a few years, and a good one if you are certain you will not.
About discount points
Buying a point means paying one per cent of the loan at closing in exchange for a permanently lower rate. A quarter of a point of rate per point paid is a common exchange, but it is not a rule — it varies by lender and by day, so use the figure you have actually been quoted.
On $300,000, one point costs $3,000 and a quarter-point rate cut takes 6.5% to 6.25%. That lowers the payment by $49.05 a month, so it takes 62 months — a little over five years — before the points have saved more than they cost. Keep the loan past then and you are ahead; sell or refinance before and you are not.
The break-even is the whole decision, and it makes points a bet on how long you stay. Most mortgages do not run their full term — people move, or refinance when rates fall — so a break-even beyond about five years deserves scepticism. Someone certain they are staying for twenty years should look at it very differently.
One thing the break-even understates: past the break-even month the saving keeps accruing for the rest of the term. On this loan the total interest saved over thirty years is $17,659 against a $3,000 outlay. The payback is slow and then it is large.
What it works out
- What the points cost and what rate they buy
- The lower payment and the monthly saving
- The month you break even
- Total interest saved over the full term
The formula
Break-even months = (Loan × Points%) ÷ (Payment without − Payment with)
The cost is the easy part: one point is one per cent of the loan, so a point on $300,000 is $3,000, payable at closing.
The saving is the difference between two ordinary payment calculations. At 6.5% the payment is $1,896.20; at 6.25% it is $1,847.15. The saving is $49.05 a month.
Three thousand divided by 49.05 is 61.2, so from month 62 the points have paid for themselves. Everything after that is profit, and there is a lot of it — over the full thirty years the lower rate saves $17,659 of interest.
The catch is that most loans do not last thirty years. A break-even of five years is fine for someone certain they are staying, and a poor bet for someone who may move or refinance. Points are a wager on duration, and the lender is on the other side of it.
- Points
- Each one costs 1% of the loan and buys a permanent rate reduction.
- Rate cut
- What one point buys. A quarter point is common but varies by lender and day.
- Payment without
- The monthly payment at the quoted rate.
- Payment with
- The monthly payment at the bought-down rate.
A worked example
A $300,000 loan at 6.5% over thirty years, buying one point at $3,000 for a quarter-point rate cut.
That works out to 62 months.
- Points cost
- $3,000.00
- Rate becomes
- 6.250%
- Payment without
- $1,896.20
- Payment with
- $1,847.15
- Saved each month
- $49.05
- Interest saved
- $17,658.89
Questions
What is a mortgage point?
One per cent of the loan, paid at closing, in exchange for a permanently lower interest rate. On a $300,000 loan a point is $3,000.
How much does a point lower the rate?
A quarter of a percentage point is typical, but it is not fixed — it varies by lender, by loan type and by day. Ask what your lender is actually offering rather than assuming the usual figure.
Are mortgage points worth it?
Only if you keep the loan past the break-even. On these figures that is 62 months. Past it the saving is substantial — $17,659 over the full term — and before it you have simply paid $3,000 for nothing.
What is the break-even on points?
The cost divided by the monthly saving. $3,000 of points saving $49.05 a month breaks even at month 62, a little over five years.
Should I buy points or make a larger deposit?
A larger deposit reduces the loan and may also get you past the threshold that avoids mortgage insurance, which is often worth more than a quarter point of rate. Work out both before committing the cash to either.
Are points tax deductible?
They can be, depending on where you live, whether it is a purchase or a refinance and your own circumstances. That is a question for someone who knows your tax position, and it can move the break-even meaningfully.
What are negative points?
The opposite trade: the lender gives you a credit towards closing costs in exchange for a higher rate. It is the right choice when you expect to move soon, for the same reason points are the wrong one.
Can I buy a fraction of a point?
Usually, yes — half and quarter points are common. The break-even is unchanged by the size, since cost and saving scale together; only the total sums move.