Calculate Break Even for Mortgage Points

What Are Mortgage Points?

Mortgage points are fees paid to the lender at closing, typically expressed as a percentage of the loan amount. Each point equals 1% of the loan amount. For example, 1 point on a $200,000 loan is $2,000.

Points reduce your interest rate, which can lower your monthly payments and total interest paid over the life of the loan. However, the upfront cost must be offset by the savings to make points worthwhile.

How to Calculate Break Even

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

Where:

• Points Cost = Number of points × Loan amount
• Monthly Savings = Original monthly payment - New monthly payment with lower rate

If the break-even period is less than the loan term, paying points makes financial sense. If it's longer, the points may not be worth it.

Example Calculation

Suppose you're considering 1 point on a $200,000 loan with these details:

• Original interest rate: 6%
• New interest rate with 1 point: 5.5%
• Loan term: 30 years (360 months)

1. Calculate the points cost: $200,000 × 1% = $2,000

2. Calculate the original monthly payment: $200,000 × (0.06/12) / (1 - (1 + 0.06/12)^-360) ≈ $1,264.14

3. Calculate the new monthly payment: $200,000 × (0.055/12) / (1 - (1 + 0.055/12)^-360) ≈ $1,187.66

4. Calculate monthly savings: $1,264.14 - $1,187.66 = $76.48

5. Calculate break-even months: $2,000 / $76.48 ≈ 26.17 months

Since 26.17 months is less than 360, paying 1 point makes financial sense in this scenario.

When to Use Points

Consider using points if:

• You plan to stay in the home long-term (break-even period is short)
• You can afford the upfront cost
• You have excellent credit (lenders may offer discounts)

Avoid points if:

• You plan to sell or refinance soon (break-even period is long)
• You're on a tight budget
• You have lower credit scores (points may not be discounted)