Mortgage points
Mortgage points, or discount points, are prepaid interest: a cash charge at closing, usually 1 percent of the loan per point, paid to cut the contract rate.
A discount point buys a lower rate with cash today. One point is 1 percent of the loan. Whether that cash is recovered depends on how long you keep the loan, because the saving arrives as a slightly smaller monthly payment stretched over years. Divide the cash cost by the monthly payment cut and you have the cash-flow break-even in months: . Leave before then and the points have not yet paid for themselves in lower payments. Stay to term and the interest bill falls by many times the points cost, but that figure assumes you keep this loan for the whole term, which most people do not. The break-even month is the figure that matches how long you actually expect to hold it.
The mortgage points calculator uses that cash-flow test on purpose. It ignores that the points are paid today and the saving arrives later. A present-value test would lengthen the wait, and naming a discount rate would pretend to know what else you would have done with the cash. If that cash would otherwise have paid down principal, that is a different comparison.
Lender credits run the identity backwards: a higher rate in exchange for cash toward closing. Origination charges that do not buy a lower rate are just fees, in the same family as an origination fee, and they have no break-even of this kind. Refinancing resets the clock. Points are recovered only while this loan is the one you are paying. Tax treatment of points depends on the loan type and the jurisdiction, and it changes. The identity counts the cash at closing against the payment saving.