Mortgage points calculator

A discount point is prepaid interest: 1 percent of the loan, paid in cash at closing, in exchange for a lower contract rate. On $400,000, one point is $4,000. Whether that $4,000 is a good trade depends on how long you keep the loan, because the saving arrives as a slightly smaller monthly payment stretched over years.

At 6.75 percent over 30 years the scheduled payment is $2,594.39. At 6.50 percent it is $2,528.27. The difference is $66.12 a month. Divide the $4,000 cost by that saving and the cash-flow break-even is 60.5 months, a little over five years. Leave before then and the points have not yet paid for themselves in lower payments. Stay to term and the interest bill falls by $23,803.31, which is many times the $4,000, because every remaining month is cheaper.

That second figure is not a reason to buy points on its own. It assumes you keep this loan for 30 years, which most people do not. The break-even month is the figure that matches how long you actually expect to hold it.

Dividing cost by monthly saving ignores that the $4,000 is paid today and the $66.12 arrives later. A present-value test would discount those savings at some rate, which lengthens the wait. This page uses the cash-flow test because that is the one a closing disclosure supports without picking a discount rate, and because naming a rate would pretend we know what else you would have done with the $4,000.

If those dollars would otherwise have paid down principal, the extra payment calculator is the comparison. If they would otherwise have stayed in cash, the cash-flow break-even is close to the right test. If they would otherwise have been invested, you need a return assumption this page will not supply.

A 15-year loan changes the arithmetic because there are fewer months of saving to recover the same points. On a $300,000 15-year loan, 1.50 points cost $4,500 and a cut from 6.25 percent to 5.875 percent saves $60.91 a month, so break-even is 73.88 months. Held to the 15-year term, interest falls by $10,964.36.

If the advertised 'lower rate' does not actually cut the payment, there is no break-even. That sounds like a data-entry error, and it usually is: points paid for a rate that did not move, or a term that shortened enough to offset the rate cut. The calculator reports n/a rather than a negative month count, because a negative break-even is not an answer, it is a sign the two rates are in the wrong boxes.

Lender credits are the identity run backwards: you take a higher rate and the lender pays cash toward closing. The break-even then asks how long you must stay for the higher payment to cost more than the credit you took. Swap the two rates and read the cost as a negative points figure in your own notes; this calculator's sliders are built for discount points paid, not credits received.

Points are recovered only while this loan is the one you are paying. Refinance in year three and the remaining un-recovered points are gone, along with the remaining payment saving, unless the new loan's rate is lower still. The refinance break-even calculator is the tool for that second decision. Do not add the two break-evens. They are sequential, and the first one is truncated by the second.

Tax treatment of points depends on the loan type and the jurisdiction, and it changes. This page counts the cash at closing and the payment saving, which is the arithmetic either way. Whether a deduction is available, and in which year, is a tax-year fact, not a formula one.