Break Even Mortgage Point Calculator
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Reviewed by Calculator Editorial Team
Understanding the break even point for mortgage points is crucial when considering whether to pay points to lower your interest rate. This calculator helps you determine the exact point at which paying mortgage points becomes financially beneficial compared to keeping a higher interest rate.
What is a Break Even Mortgage Point?
A break even mortgage point is the point at which the cost of paying mortgage points is offset by the savings from having a lower interest rate. Mortgage points are fees paid to the lender, typically 1% of the loan amount, which can lower your interest rate.
For example, if you pay 1 point (1% of the loan amount), you might get a lower interest rate. The break even point is the number of years it will take for the savings from the lower rate to equal the cost of the points.
Key Concept
The break even point helps you decide whether paying points is worth it based on your financial situation and loan terms.
How to Calculate Break Even Mortgage Point
The break even mortgage point can be calculated using the following formula:
Break Even Mortgage Point Formula
Break Even Point (Years) = (Points Paid × Loan Amount) / (Annual Savings from Lower Rate)
Where:
- Points Paid - The number of points you're paying (typically 0.5% to 1%)
- Loan Amount - The total amount you're borrowing
- Annual Savings from Lower Rate - The annual interest savings from the lower rate
For example, if you pay 1 point on a $200,000 loan and save $1,000 per year in interest, the break even point would be 2 years.
Example Calculation
Let's say you're considering a mortgage with the following details:
- Loan amount: $200,000
- Current interest rate: 5%
- Interest rate after paying 1 point: 4.5%
- Point cost: 1% of loan amount = $2,000
Step 1: Calculate annual interest savings
At 5% rate: $200,000 × 0.05 = $10,000 per year
At 4.5% rate: $200,000 × 0.045 = $9,000 per year
Annual savings: $10,000 - $9,000 = $1,000
Step 2: Calculate break even point
Break Even Point = $2,000 / $1,000 = 2 years
This means it will take 2 years for the savings from the lower rate to cover the cost of the points.
Factors Affecting the Break Even Point
Several factors can affect where your break even point falls:
- Loan term - Longer loan terms may make paying points more beneficial
- Interest rate difference - A larger difference between rates can lower the break even point
- Point cost - Higher point costs will increase the break even point
- Loan amount - Larger loans may have higher break even points
| Factor | Effect on Break Even Point |
|---|---|
| Lower interest rate difference | Higher break even point |
| Higher point cost | Higher break even point |
| Longer loan term | Lower break even point |
| Larger loan amount | Higher break even point |
When to Use This Calculator
This calculator is most useful when:
- You're considering paying mortgage points to lower your interest rate
- You want to compare different mortgage scenarios
- You're trying to understand the financial implications of paying points
- You need to make an informed decision about whether to pay points
Practical Advice
Consider your financial situation and goals when deciding whether to pay points. If you plan to stay in your home for many years, paying points may be beneficial. If you plan to sell soon, the break even point may not be as relevant.