Break Even Calculator for Mortgage Points

What Are Mortgage Points?

Mortgage points are fees paid to the lender at closing to reduce your interest rate. Typically, one point equals 1% of the loan amount. For example, if you take out a $300,000 mortgage, one point would cost $3,000.

The primary benefit of points is a lower interest rate, which can significantly reduce your monthly payments and total interest paid over the life of the loan. However, the upfront cost must be weighed against the long-term savings.

How to Calculate Break Even

The break even point for mortgage points is the number of months it takes for the savings from lower interest rates to equal the upfront cost of the points. The formula is:

Where:

• Points Cost = Number of points × Loan amount
• Monthly Interest Savings = Original monthly interest payment - New monthly interest payment

For example, if you pay 1 point on a $300,000 loan at 6% interest, the points cost $3,000. If the new interest rate is 5%, the monthly interest savings would be calculated based on the loan terms.

Example Calculation

Let's say you're considering a $300,000 mortgage with these options:

Using our calculator, you can determine that paying 1 point would break even in approximately 18 months. This means you would save $1,000 per month ($1,624.15 - $1,524.15) and recover the $3,000 points cost in 18 months.

Key Factors to Consider

Several factors influence when mortgage points become cost-effective:

• Loan Term: Shorter loan terms mean you'll pay points back faster.
• Interest Rate Reduction: Larger reductions from points mean faster break even.
• Property Value: Higher property values may justify more points.
• Down Payment: Larger down payments can reduce the loan amount and points cost.

Our calculator accounts for these factors to provide an accurate break even analysis tailored to your specific situation.