Mortgage Discount Points Break Even Calculator

Mortgage discount points are fees paid to the lender to reduce your interest rate. This calculator helps you determine when paying discount points will break even with the savings on your mortgage payments.

What Are Discount Points?

Discount points are fees paid to the lender at closing to reduce your mortgage interest rate. Each point equals 1% of the loan amount. For example, on a $200,000 loan, one point equals $2,000.

Lenders offer discount points to attract borrowers, especially those with strong credit scores or who can qualify for lower rates. The points typically reduce your interest rate by 0.25% to 0.50% per point.

How Discount Points Work

When you pay discount points, you're essentially paying the lender upfront to get a lower interest rate. This can significantly reduce your total interest payments over the life of the loan.

Interest Rate Reduction

Each discount point typically reduces your interest rate by 0.25% to 0.50%. For example, paying 1 point on a 6% interest rate might reduce it to 5.75% or 5.50%.

The break even point occurs when the savings from lower payments equals the cost of the discount points.

Break Even Calculation

The break even calculator determines how long it will take for the savings from lower payments to offset the cost of the discount points. The formula used is:

Break Even Formula

Break Even Months = (Discount Points × Loan Amount) / (Monthly Savings)

Where Monthly Savings = (Original Monthly Payment - New Monthly Payment)

This calculation helps you decide whether paying discount points is worth it for your specific mortgage situation.

Example Calculation

Let's say you're considering paying 1 point on a $200,000 loan with a 6% interest rate over 30 years:

Original monthly payment: $1,102.46
New interest rate after 1 point: 5.75%
New monthly payment: $1,034.56
Monthly savings: $67.90
Cost of 1 point: $2,000
Break even months: ($2,000) / ($67.90) = 29.45 months

In this example, paying the discount point would break even in about 29 months, or 2 years and 5 months.

Frequently Asked Questions

How much do discount points cost?

Discount points typically cost 0.25% to 1% of the loan amount, depending on the lender and your creditworthiness. Each point equals 1% of the loan amount.

How do discount points affect my interest rate?

Each discount point usually reduces your interest rate by 0.25% to 0.50%. For example, paying 1 point on a 6% rate might reduce it to 5.75% or 5.50%.

When should I consider paying discount points?

Consider paying discount points if you plan to stay in your home for a long time, as the savings will outweigh the upfront cost. Use our break even calculator to determine the optimal timeframe.