Calculate Points Break Even Mortgage

Determining when mortgage points become cost-effective is crucial for homebuyers. Our calculator helps you find the break-even point where the savings from lower interest rates outweigh the cost of points.

What is Points Break Even?

Points break even refers to the point at which the savings from a lower interest rate achieved by paying points outweigh the cost of those points. Points are fees paid to the lender in exchange for a lower interest rate on your mortgage.

Points are typically expressed as a percentage of the loan amount. For example, 1 point on a $200,000 loan would cost $2,000.

The break-even point is the number of years it takes for the savings from the lower interest rate to equal the cost of the points. If you plan to stay in your home for less time than the break-even period, paying points may not be cost-effective.

How to Calculate Points Break Even

The calculation involves comparing the cost of points to the savings from the lower interest rate. The formula is:

Points Break Even (Years) = (Points Cost) / (Annual Savings from Lower Interest Rate)

Where:

Points Cost = Points Paid × Loan Amount
Annual Savings from Lower Interest Rate = (Original Interest Rate - New Interest Rate) × Loan Amount

For example, if you pay 1 point on a $200,000 loan and the interest rate drops from 6% to 5%, the annual savings would be $2,000.

Example Calculation

Let's say you're considering a $200,000 mortgage with these details:

Loan Amount	$200,000
Original Interest Rate	6%
New Interest Rate (with points)	5%
Points Paid	1 point (1% of loan amount)

Calculating the break-even point:

Points Cost = 1% × $200,000 = $2,000

Annual Savings = (6% - 5%) × $200,000 = $2,000

Break Even = $2,000 / $2,000 = 1 year

This means if you plan to stay in your home for less than 1 year, paying points is not cost-effective. If you plan to stay longer, the points become worthwhile.

Factors Affecting Points Break Even

Several factors influence when points become cost-effective:

Loan Term: Longer loan terms increase the break-even period.
Interest Rate Difference: A larger difference between the original and new interest rate reduces the break-even period.
Points Cost: Higher points costs increase the break-even period.
Property Value: Higher property values may make points more attractive.

Using our calculator, you can adjust these factors to see how they impact the break-even point.

FAQ

What are mortgage points?: Mortgage points are fees paid to the lender in exchange for a lower interest rate on your mortgage. They are typically expressed as a percentage of the loan amount.
How do points affect my interest rate?: Points reduce your interest rate by a certain amount. For example, paying 1 point might lower your rate by 0.25 percentage points.
When should I consider paying points?: Consider paying points if you plan to stay in your home for longer than the break-even period. Our calculator helps you determine this period.
Are there any hidden costs with points?: Points are typically upfront fees, but some lenders may charge additional fees or require prepayment penalties. Always review the terms carefully.
Can I recalculate the break-even point if my plans change?: Yes, our calculator allows you to adjust the inputs and recalculate the break-even point as needed.