Mortgage discount points calculator

Mortgage points, also called discount points, are a way of lowering your interest rate but require you to pay more at closing. It's essentially paying interest upfront in exchange for a lower interest rate over the lifetime of the loan. Purchasing one mortgage discount point usually reduces your interest rate by .25%. So, for example, you could buy two discount points and lower the interest rate on your mortgage by .5%. 

 

How much the point lowers your interest rate varies from lender to lender. Lenders also set their own limits on the number of points that you can buy.

Points cost 1% of your total mortgage amount. That's because a percentage is also called a point in banking. Thus, one percent equals one point. So, for example, if you were taking out a mortgage for $250,000, then one point would cost you $2,500, or 1% of the total loan. 

 

Payment for mortgage points is a cost due at closing. Some lenders may offer you the option of rolling your discount point purchase into the cost of the mortgage. This gives you a slightly larger starting balance but a lower monthly interest rate. This could lower the monthly payment amount, which for some people may make buying the home more manageable for their budget, even if they are paying more in interest over the life of the loan.

Knowing your breakeven point is key for understanding whether mortgage points are a good financial decision in your particular financial situation.

 

The breakeven point is when you've saved enough on your payments to pay yourself back for the cost of the discount point. After you reach this point, you'll save money on the cost of your loan.

 

Here is how to figure out the breakeven point using the information from the Mortgage Points calculator above:

 

Cost of discount points / Monthly interest savings = number of months until you break even.

 

If the number of months it takes you to break even is less than the amount of time you plan to stay in your house, then paying for those two discount points could end up saving you money. If the number of months until you break even exceeds the time you plan to live in your home, you could end up losing money by buying the points because you could likely end up selling before you reached the break even point.

Mortgage discount points can work the other way, too. Instead of lowering your interest rate, you might receive money from the bank in exchange for paying a slightly higher interest rate. This is common on mortgage offers that include no cash due at closing. Instead of paying closing costs, you'll end up paying more interest and a slightly higher monthly payment. This may be helpful if you are comfortable with a monthly mortgage payment but are struggling to come up with the capital to cover the closing costs associated with the loan.

Like many issues in home financing, the answer to "Should I buy mortgage points?" depends on many factors. Here are some important things to keep in mind when deciding if you should pay points:

 

• How long you plan on living in the home. If you only plan on living in the home for a few years, it doesn’t make financial sense to buy mortgage discount points. You could end up paying out more than you end up saving on your interest. If you intend to stay in the home for decades, buying points could save you interest over the life of the loan.
• How much money you have to have at closing. Closing costs are typically between 3% and 6% of the purchase price. If you know you’ll have spare capital left over, using that money to buy mortgage discount points may be beneficial. If, however, you are struggling to cover closing costs already, you may not want to increase that initial cash output.
• Whether you'll need the cash after you move into your home. If you'll have spare cash after closing, think about the best uses for that money. While it could buy points, you might need to invest it in renovations. If you anticipate your new property needing a lot of work done to it, then saving your cash for those projects may be a good option.