Mortgage Points Break-Even Calculator

Buying a home is a significant financial decision, and understanding the costs involved is crucial. One important factor to consider is mortgage points. This calculator helps you determine the break-even point for mortgage points, showing you how long it will take for the points to pay for themselves through lower interest rates.

What are mortgage points?

Mortgage points are fees paid to the lender at closing to reduce your interest rate. Typically, one point equals 1% of the loan amount. For example, if you take out a $200,000 mortgage with 1 point, you'll pay $2,000 upfront.

The benefit of points is that they lower your interest rate, which can save you money over the life of the loan. However, the upfront cost must be offset by the savings on interest payments.

Key Point

Points are typically paid at closing, but some lenders offer discounted points if you pay them upfront. Always compare the total cost of points versus the savings on interest payments.

How to calculate break-even

The break-even point for mortgage points is the number of months it takes for the savings on interest payments to equal the cost of the points. The formula is:

Break-Even Formula

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

Where:

Points Cost = Number of 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 and your interest rate drops from 6% to 5%, the break-even point would be calculated as follows:

Calculation	Value
Points Cost	$2,000 (1 point × $200,000)
Monthly Interest Savings	$133.33 (($6,000 - $5,000) / 12)
Break-Even Months	15 months ($2,000 / $133.33)

Example calculation

Let's say you're considering a $300,000 mortgage and want to know if paying 1.5 points is worth it if it reduces your interest rate from 5.5% to 5%.

Example Calculation

Points Cost = 1.5 × $300,000 = $4,500

Monthly Interest Savings = ($5,500 - $5,000) / 12 = $41.67

Break-Even Months = $4,500 / $41.67 ≈ 108 months (9 years)

This means it would take about 9 years for the savings from the lower interest rate to offset the cost of the points. If you plan to stay in the home for less than 9 years, paying points may not be cost-effective.

Factors to consider

When deciding whether to pay mortgage points, consider these additional factors:

Loan term: Shorter loan terms mean you'll pay points more quickly, making them more valuable.
Property value appreciation: If the home appreciates, you'll benefit from points even if you sell before the break-even point.
Refinancing options: If interest rates drop significantly, you might refinance without paying points.
Closing costs: Points are just one part of closing costs. Compare the total cost of points versus other fees.

Pro Tip

Use this calculator to compare different scenarios. For example, try calculating the break-even for 1 point versus 2 points to see which offers the best value for your situation.

FAQ

What is the difference between points and discount points?

Points are paid at closing and typically reduce your interest rate by 0.25% per point. Discount points are paid upfront and often offer a slightly better interest rate reduction, sometimes as much as 0.28% per point.

Are mortgage points tax deductible?

In most cases, mortgage points are not tax deductible. However, if you're self-employed, you may be able to deduct them as a business expense. Consult a tax professional for advice specific to your situation.

Can I negotiate the number of points I pay?

Yes, you can often negotiate the number of points you pay. Lenders may offer discounts if you have good credit, a large down payment, or other qualifying factors. Always shop around and compare offers.