Estimate payment reduction, breakeven time, and total savings from buying mortgage points.
Mortgage Scenario Inputs
Compare your base loan offer against buying discount points.
Understanding Mortgage Points
Also known as "Discount Points"
What is a "Point"?
One "point" equals 1% of your loan amount. On a $400k loan, 1 point costs $4,000. It is a fee you pay at closing.
The Rate Buy-down
In exchange for the fee, the lender lowers your interest rate for the life of the loan. A typical trade is 1 Point cost for 0.25% lower rate.
Formula Used
Breakeven (Months) = Cost of Points / Monthly Savings
Cost of Points = Loan Amount * (Points % / 100)
This calculates the "Simple Payback Period". It does not account for the Time Value of Money (opportunity cost of investing that cash instead), which would make the true breakeven slightly longer.
When locking in a mortgage, lenders will often ask, "Do you want to buy points?" It sounds enticing: pay a fee upfront to get a lower interest rate forever. But is it a trap or a smart investment? This guide helps you run the numbers.
In the mortgage world, a "point" is simply a unit of measurement equal to 1% of your loan amount. If you borrow $300,000, one point costs $3,000.
"Discount Points" are essentially prepaid interest. You give the lender cash at closing (increasing your "Closing Costs"), and in exchange, they agree to reduce the interest rate on your note for the entire 30-year term. This is different from "Origination Points", which are just fees for processing the loan and do not lower your rate.
The Mechanics: Buying Down the Rate
There is no federal law setting the price of a rate cut, but the industry standard often hovers around:
1 Point (Cost) ≈ 0.25% Rate Reduction (Benefit)
Example scenario:
Base Offer: 7.00% rate with $0 points.
Option A: Pay 1 point ($3,000) to get 6.75%.
Option B: Pay 2 points ($6,000) to get 6.50%.
The lender is indifferent. Mathematically, they earn roughly the same yield either way. The choice depends entirely on YOUR timeline.
The All-Important Breakeven Analysis
This is the only metric that matters. You are writing a check for $3,000 today to save, say, $50 a month.
Breakeven Months = Upfront Cost / Monthly Savings
In this example: $3,000 / $50 = 60 months (5 years).
If you sell the house in Year 3, you LOST money. You paid $3,000 to save $1,800.
If you stay for 10 years, you WON. You paid $3,000 to save $6,000.
The Refinance Trap: Many people buy points intending to stay for 30 years, but then rates drop 2 years later. They refinance to get the new lower market rate. The points they bought on the original loan are wasted.
Tax Implications
Discount points are considered prepaid mortgage interest, which means they are generally tax-deductible on Schedule A if:
The loan is for your primary residence.
You itemize your deductions (instead of taking the Standard Deduction).
You actually paid cash at closing (didn't roll it into the loan).
This can effectively lower the "Net Cost" of the points. If you are in the 24% tax bracket, a $4,000 point cost might save you $960 in taxes, bringing the real cost down to $3,040, which shortens your breakeven period. *Always consult a CPA.
The Opportunity Cost Argument
Financial purists argue against points because of Opportunity Cost. That $4,000 you paid to the lender could have been invested in the Stock Market.
Buying points is effectively a "Guaranteed Risk-Free Return" equal to the rate reduction. If you lower your rate from 7% to 6.75%, you are "saving" 7% interest on the principal you didn't borrow. Effectively, buying points yields a return roughly equal to the interest rate of the mortgage.
Use this rule: If you have high-interest debt (Credit Cards at 20%), NEVER buy mortgage points. Use the cash to pay off the 20% debt first.
Strategic Decision Guide
When to BUY Points
This is your "Forever Home" (10+ year horizon).
Interest rates are historically low (unlikely to refinance lower).
You have plenty of cash reserves left over.
You need a slightly lower monthly payment to qualify for DTI (Debt-to-Income) ratios.
The seller is offering "Seller Concessions" to pay your closing costs. Use *their* money to buy down *your* rate!
When to SKIP Points
This is a starter home (planning to move in 5-7 years).
Interest rates are high (likely to refinance when they drop).
Cash is tight; you barely have enough for the down payment.
You prefer liquidity (cash in bank > slightly lower payment).
The breakeven period is > 7 years.
Frequently Asked Questions
Common questions about buying points
What is a "Par Rate"?
The "Par Rate" is the interest rate a lender offers with zero points paid and zero credits given. It is the baseline market rate for your credit score.
Can I buy a fraction of a point?
Yes. Lenders often offer buydowns in increments like 0.125, 0.25, 0.5, etc. You can buy 0.875 points if that's exactly how much cash you have.
What are "Negative Points"?
This is a Lender Credit. Instead of paying a fee, the lender PAYS YOU (usually to cover closing costs) in exchange for a higher interest rate. This is great for short-term ownership.
Is there a limit to how many points I can buy?
Yes. "Qualified Mortgage" (QM) rules generally cap total points and fees at 3% of the loan amount. Most lenders won't let you buy more than 2-3 points.
Can I add the cost of points to my loan?
Generally, no. Points are a closing cost and usually must be paid in cash. However, slightly flexible lenders might let you roll it in, but this means you are paying interest on your interest, which negates the benefit.
Do points affect APR?
Yes! APR (Annual Percentage Rate) includes the interest rate PLUS fees. Since points are a fee, buying points increases the difference between your Note Rate and your APR. If you see a low rate but a huge APR, it's because the lender included points in the calculation.
What if I refinance later?
If you refinance, you lose the benefit of the points you paid on the old loan. You have to start over. This is why you should only buy points if you are certain rates won't drop significantly soon.
Usage of this Calculator
Best use cases for this comparison tool
Target Audience
New HomebuyersDeciding how to allocate finite cash reserves between Down Payment vs. Buying Points.
RefinancersCalculating if the cost of a refinance (often including points) is justified by the savings.
Real Estate AgentsTo explain to sellers how offering concessions for rate buydowns is more attractive to buyers than a simple price cut.
Mortgage BrokersTo vividly demonstrate the "Payback Period" to clients who are skeptical about closing costs.
Real-World Strategies
The "Forever Home" Strategy
Scenario: You are buying your dream home and never plan to move. Rates are 5%. Action: Buy 2 points to get 4.5%. Result: Breakeven is 5 years. You enjoy 25 years of "pure savings" after that.
The "Temporary 2-1 Buydown"
Scenario: You are a builder trying to sell a home. Action: Instead of dropping price by $10k, use $10k to buy down the buyer's rate for the first 2 years. Result: Buyer qualifies easier, payment is lower, and you sell the house faster.
Summary
The Mortgage Points Impact Calculator quantifies the trade-off between upfront cash and long-term savings.
It cuts through the sales pitch to show you the exact Breakeven Date.
Use it to align your mortgage strategy with your life plans (how long you stay) rather than just chasing the lowest advertised rate.
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Estimate payment reduction, breakeven time, and total savings from buying mortgage points.
How to use Mortgage Points Impact Calculator
Step-by-step guide to using the Mortgage Points Impact Calculator:
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Frequently asked questions
How do I use the Mortgage Points Impact Calculator?
Simply enter your values in the input fields and the calculator will automatically compute the results. The Mortgage Points Impact Calculator is designed to be user-friendly and provide instant calculations.
Is the Mortgage Points Impact Calculator free to use?
Yes, the Mortgage Points Impact Calculator is completely free to use. No registration or payment is required.
Can I use this calculator on mobile devices?
Yes, the Mortgage Points Impact Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.
Are the results from Mortgage Points Impact Calculator accurate?
Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.