Mortgage Points Calculator: Calculate if Buying Down Your Interest Rate Is Worth It
Mortgage points, also called discount points, are upfront fees you can pay to reduce your mortgage interest rate and monthly payments. One point costs 1% of the loan amount and typically reduces the rate by 0.25%.
Understanding Break-Even Points
To determine if buying points makes financial sense, calculate the break-even point:
- Calculate the total cost of points (1 point = 1% of loan amount)
- Calculate monthly payment savings from reduced rate
- Divide total cost by monthly savings to find break-even time in months
Example:
- $300,000 loan at 7% interest
- One point ($3,000) reduces rate to 6.75%
- Monthly payment drops from $1,996 to $1,946 (saves $50/month)
- Break-even: $3,000 ÷ $50 = 60 months (5 years)
When Buying Points Makes Sense:
- You have extra cash after down payment and emergency fund
- You plan to keep the loan longer than the break-even period
- The monthly savings significantly impact your budget
- Seller offers to pay for points (common in buyer's markets)
When to Skip Buying Points:
- Planning to sell/refinance before break-even
- Need cash for other purposes (repairs, renovations)
- Monthly savings are minimal
- Interest rates are expected to drop soon
Remember: Mortgage points are in addition to standard closing costs (2-6% of loan amount). Consider your complete financial picture and long-term plans before deciding to buy points.
Tax Benefit: Mortgage points may be tax-deductible, either in the year paid or over the loan's life, depending on your situation. Consult a tax professional for guidance.
Using a mortgage points calculator can help determine if buying points aligns with your financial goals by showing exact costs, savings, and break-even timelines for your specific situation.