Calculate Mortgage Points Break Even

Mortgage points are fees paid to the lender to reduce your interest rate. However, these points cost money upfront. The break-even point is the time when the savings from lower interest outweigh the cost of the points. This calculator helps you determine when paying mortgage points becomes financially beneficial.

What Are Mortgage Points?

Mortgage points are fees equal to 1% of the loan amount. For example, if you take out a $300,000 mortgage, one point would cost $3,000. These points typically reduce your interest rate by a certain percentage, usually 0.25% to 0.50% per point.

Points are often required for certain loan programs or can be used to secure a lower interest rate. However, they come with a cost that must be offset by the savings on interest payments over the life of the loan.

How to Calculate Break Even

The break-even point for mortgage points is calculated by determining how long it takes for the savings from lower interest to equal the cost of the points. The formula is:

Break Even Formula

Break Even Months = (Cost of Points) / (Monthly Interest Savings)

Where:

Cost of Points = Number of Points × 1% of Loan Amount
Monthly Interest Savings = (Original Interest Rate - New Interest Rate) × Loan Amount / 12

If the break-even period is shorter than the loan term, paying points is financially beneficial. If it's longer, the points may not be worth it.

Example Calculation

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

Option 1: 4.5% interest rate, no points
Option 2: 4.0% interest rate, 1 point ($3,000)

Using the calculator:

Enter loan amount: $300,000
Enter original interest rate: 4.5%
Enter new interest rate: 4.0%
Enter number of points: 1
Click "Calculate"

The calculator will show that the break-even point is approximately 12 months. This means you would need to keep the loan for at least 12 months to recover the cost of the point through lower interest payments.

Factors to Consider

While the break-even calculation is useful, other factors may influence your decision:

Loan Term: If you plan to sell the home before the break-even period, points may not be worth it.
Refinancing: If you plan to refinance soon, the points may be offset by the refinance savings.
Market Conditions: Interest rates can change, affecting the break-even calculation.
Other Fees: Some loan programs include points as part of the closing costs, which may affect your decision.

Important Note

This calculator provides an estimate. Actual results may vary based on your specific loan terms and market conditions. Always consult with a mortgage professional for personalized advice.

FAQ

What is the difference between points and discount points?: Points are paid upfront to lower your interest rate, while discount points are given to the lender to reduce the rate without upfront payment. Discount points are typically used by investors or when refinancing.
Can I get points back if I sell my home?: No, mortgage points are not refundable. They are considered a cost of borrowing and are not returned when you sell the home.
Are there any tax benefits to paying points?: In some cases, mortgage points may be tax-deductible as a business expense if you're using the home for business purposes. However, this depends on your specific situation and tax laws.
How do points affect my monthly payment?: Points reduce your interest rate, which typically lowers your monthly payment. However, the exact impact depends on the loan term and other factors.
Can I negotiate the number of points I pay?: Yes, in some cases you can negotiate the number of points with your lender, especially if you have good credit or other qualifying factors.