Mortgage Points Break Even Calculation Formula

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 equals $2,000.

Points typically range from 0.5 to 2 points, with higher points offering lower interest rates. Common point levels include:

• 0.5 point (0.25% discount)
• 1 point (0.5% discount)
• 1.5 points (0.75% discount)
• 2 points (1% discount)

The break even period is the time it takes for the interest savings to equal the cost of the points.

Break Even Formula

The mortgage points break even calculation determines how long it takes for the interest savings to offset the cost of points.

Where:

• Points Cost = Points × Loan Amount
• Monthly Interest Savings = (Original Interest Rate - New Interest Rate) × Loan Amount / 12

For example, if you pay 1 point on a $200,000 loan at 5% interest, the points cost is $2,000. If the new interest rate is 4.5%, the monthly savings is $250. The break even period is 2 years.

How to Use the Calculator

1. Enter your loan amount
2. Select the number of points you're paying
3. Enter your original interest rate
4. Enter your new interest rate after points
5. Click "Calculate" to see the break even period

The calculator will show you how long it will take for the interest savings to cover the cost of the points.

Example Calculation

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

• Loan amount: $200,000
• Points: 1 point ($2,000)
• Original interest rate: 5%
• New interest rate: 4.5%

The monthly interest savings would be:

The break even period is:

This means it will take 2 years for the interest savings to equal the cost of the 1 point.