Using the Mortgage Points Break-Even Calculator
This mortgage points calculator assumes that you'll roll the cost of your points into the mortgage. Enter the total cost of the mortgage with points in the box marked "Mortgage amount." The calculator will determine the size of the loan without points for comparison.
- "Term in years" is the length of the mortgage.
- Enter the number of points under "Discount points" – note that you can enter negative points as well, to reduce your closing costs in return for a higher rate. Fractional points can also be entered manually, though the slider will only reflect whole numbers.
- Under "Points rate" enter the reduced rate you will pay with discount points.
- Under "Interest rate" enter the standard rate you would pay with no points. .
- "Years in home" is how long you expect to stay in the home. Based on this figure, the calculator will determine how much your will save or it will cost you to pay for points.
- To find your break-even point, use the green triangle slider to adjust "years in home" to find the point you go from costs to savings.
- "View report" will provide you with an amortization schedule comparing the loan with and without points. This will allow you to compare interest savings over time as well as the rate at which you're paying down loan principle, so you can project your home equity at any point in the loan.
About Mortgage Discount Points
Discount points are a common feature of mortgages, but they can be confusing for many borrowers. Just how do they work?
Discount points are a type of pre-paid interest. So by paying part of your interest up front, you can get a lower rate. And what you save in interest over the long haul can be a lot more than what you paid for the points up front. The question is, will you save enough to make it worth the initial cost?
The key is to calculate the break-even point – how long it will take for your interest savings from a lower mortgage rate to exceed what you paid for your discount points. If you can recoup your costs in five years or so, that's often a good deal.
A big consideration is how long you expect to have the mortgage. If you sell the home or refinance the mortgage before reaching your break-even point, you'll have lost money. Or if you do so only a year or two after reaching it, your savings might not be enough to make it worthwhile.
Discount points work best for someone who expects to stay in their home and not refinance for a long time. Over 20-30 years, the savings can be substantial – in the tens of thousands of dollars. However, if it takes a long time to reach your break-even point, say 10-15 years, you have to ask yourself whether the small savings you'll realize each month are worth the trouble, even if you expect to stay in the home longer than that.
Because discount points are prepaid interest, they can also be deductible as mortgage interest on your tax return if you itemize deductions. However, fewer borrowers are itemizing these days due to recent changes in tax laws.
This mortgage points break-even calculator can help you determine how much you'll save each month, when you'll reach your break-even point and what your interest savings or costs will be for any point in the loan.
How much do discount points cost?
The price for discount points is always the same, regardless of lender: 1 percent of the loan amount for each point. That's where the name comes from – in financial terminology, 1 percent is commonly referred to as a "point." So if you have a $300,000 loan, one point will cost $3,000.
How much a discount point will reduce your rate varies from lender to lender, but is often between one-eighth to one-quarter of a percent. So buying one point might reduce a 5 percent rate to 4.875 percent or 4.75 percent, for example.
You can buy multiple points, fractions of a point and even negative points (more on that later). How many you can buy depends on the lender and your loan. Some lenders may let you buy 3-4 points; others may limit you to only one or two. That's something you want to check into when shopping for a mortgage and comparing offers.
You can pay for discount points up front if you wish, but they're often rolled into the loan. So you start with a somewhat higher balance but the lower rate means your monthly payments are less.
Calculating the break-even point
Determining your break-even point isn't just a matter of figuring how long it will take your monthly savings from a lower rate to exceed the cost of the points. You also want to take into account how it will affect your loan amortization, or how quickly you build home equity. That's money in your pocket as well.
This mortgage points calculator does that for you. It takes into account not only your monthly interest savings but also how much faster you're paying down loan principle to determine your overall savings and help you calculate your break-even point.
About negative points and fractional points
Negative discount points are an option a lender may offer to reduce closing costs. They work just opposite of positive discount points – instead of paying money to receive a lower rate, you are essentially given money (to cover costs) in return for a higher rate.
These are often a feature of "no closing cost" mortgages, where the borrower accepts a higher rate in return for not having to pay closing costs up front. This Mortgage Points Calculator allows you to use either positive or negative discount points.
Fractional points are commonly used by lenders to round off a rate to a standard figure, such as 4.75 percent, rather than something like 4.813 percent. Mortgage rates are typically priced in steps of one-eighth of a percent, like 4.5, 4.625, 4.75, 4.875 percent, etc., but the actual pricing is more precise than that. So lenders may charge or credit a fractional point, like 0.413 points or 1.274 points to produce a conventional figure for the mortgage rate.
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