Break Even Point Calculator for Buying Point Mortgage

Determining the break even point for buying points on a mortgage is crucial for homebuyers who want to understand the financial impact of mortgage points. This calculator helps you determine how many months it will take to recover the cost of mortgage points by comparing the savings from a lower interest rate with the upfront cost of the points.

What is the Break Even Point?

The break even point for buying points on a mortgage refers to the number of months it takes for the savings from a lower interest rate to offset the upfront cost of the points. Mortgage points are fees paid to the lender to reduce the interest rate on your loan, which can save you money over the life of the mortgage.

Understanding the break even point helps you decide whether buying points is financially beneficial. If the break even point is within your expected mortgage term, buying points can be a good investment. If the break even point is longer than your mortgage term, the points may not be worth the cost.

How to Calculate Break Even Point

The break even point can be calculated using the following formula:

Break Even Point Formula

Break Even Point (months) = (Points Cost / (Monthly Savings from Lower Rate))

Where:

Points Cost = Total cost of mortgage points (in dollars)
Monthly Savings from Lower Rate = Monthly interest savings from the lower interest rate (in dollars)

The monthly savings from the lower rate can be calculated by comparing the interest payments on the original loan and the loan with the lower rate.

Monthly Savings Calculation

Monthly Savings = (Original Monthly Interest - New Monthly Interest)

Where:

Original Monthly Interest = (Original Interest Rate / 12) × Loan Amount
New Monthly Interest = (New Interest Rate / 12) × Loan Amount

Example Calculation

Let's say you are considering buying points on a $200,000 mortgage. The original interest rate is 5%, and the new interest rate after buying points is 4%. The cost of the points is $2,000.

First, calculate the monthly savings from the lower rate:

Original Monthly Interest = ($200,000 × 5%) / 12 = $833.33
New Monthly Interest = ($200,000 × 4%) / 12 = $666.67
Monthly Savings = $833.33 - $666.67 = $166.66

Next, calculate the break even point:

Break Even Point = $2,000 / $166.66 ≈ 12 months

This means it will take approximately 12 months to recover the cost of the points. If your mortgage term is longer than 12 months, buying points is likely a good financial decision.

Interpretation of Results

The break even point calculation provides several key insights:

Financial Viability: If the break even point is within your mortgage term, buying points is financially beneficial. If the break even point is longer than your mortgage term, the points may not be worth the cost.
Interest Rate Impact: The lower the interest rate after buying points, the sooner you will recover the cost of the points.
Loan Amount Impact: Larger loan amounts will result in higher monthly savings, which can reduce the break even point.

Important Considerations

When interpreting the break even point, consider the following factors:

Mortgage Term: If your mortgage term is shorter than the break even point, buying points may not be beneficial.
Additional Costs: The cost of points may include other fees, such as appraisal fees or origination fees, which should be considered in the calculation.
Inflation: The actual savings may be affected by inflation, which can reduce the real value of the savings over time.

Frequently Asked Questions

What are mortgage points?: Mortgage points are fees paid to the lender to reduce the interest rate on your loan. Each point typically equals 1% of the loan amount.
How do mortgage points affect my interest rate?: Buying points can lower your interest rate, which can save you money over the life of the mortgage. The amount of the rate reduction depends on the number of points you buy and the lender's pricing.
Is it always beneficial to buy points on a mortgage?: Buying points is beneficial if the break even point is within your mortgage term. If the break even point is longer than your mortgage term, the points may not be worth the cost.
How do I calculate the cost of mortgage points?: The cost of mortgage points is typically calculated as the number of points multiplied by 1% of the loan amount. For example, 1 point on a $200,000 loan costs $2,000.
Can I use this calculator for different types of mortgages?: Yes, this calculator can be used for different types of mortgages, including conventional, FHA, and VA loans. However, the break even point may vary depending on the specific terms and conditions of the loan.