Mortgage Points Calculator
A discount point is interest paid early, so whether it is worth buying depends entirely on how long the loan lasts. This gives three break-evens, including one that credits the extra equity a lower rate builds and one that compares the money against investing it.
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EstimateThis calculator provides estimates for educational and informational purposes only. It does not constitute financial, investment, legal, accounting, or tax advice. Results are based on the assumptions and information entered and may differ materially from actual outcomes.
No tax benefit is assumed. Points may be deductible in the year paid on a purchase, or spread over the loan's life on a refinance, and only if you itemise. A tax professional can say whether it applies to you.
- Reports a true break-even that credits the smaller balance a lower rate leaves you with, not just cost divided by monthly saving.
- Compares buying points against investing the same cash at a return you choose.
- Shows the net position year by year, so the effect of selling or refinancing early is visible.
- Takes the discounted rate from your lender's actual quote rather than assuming a fixed reduction per point.
How to use this calculator
Enter the loan amount and term, the rate you are quoted with no points, the number of points on offer and the rate they buy. Take both rates from the lender's own quote — the reduction per point is not a fixed convention and varies by day, by lender and by loan size.
Then enter the figure the whole answer turns on: how long you expect to keep this loan. Not the term — how long until you sell or refinance. Everything else is arithmetic; this is a judgement about your life.
The advanced field sets the return you would earn on the money if you did not spend it on points, which is the honest alternative use of the cash.
How the break-even is worked out
Point cost = loan amount × points ÷ 100
Monthly saving = payment(base rate) − payment(discounted rate)
Simple break-even = point cost ÷ monthly saving
True break-even = first month where
cumulative saving + equity gained ≥ point cost
The simple version is what most calculators report and it is slightly pessimistic, because it ignores a second effect: a lower rate means more of each payment goes to principal, so you owe less on the day you sell. The true break-even credits that.
The third measure asks a different question. If the point money had gone into an investment instead, it would have grown. The break-even against that alternative is later, and it is the right comparison only if you would genuinely have invested the cash rather than spent it.
A worked example
A $400,000 loan over 30 years quoted at 6.75% with no points, or 6.375% with one point. The point costs $4,000.
The payment falls from about $2,594 to about $2,495 — a saving of $99 a month. The simple break-even is $4,000 ÷ $99, or about 40 months. The true break-even, once the extra principal paydown is counted, is about 32 months.
Over seven years the points return roughly $6,550 net. Over one year they lose money. The stated 30-year interest saving — around $35,600 — is the least relevant figure of the three, because almost nobody keeps a mortgage for thirty years.
How to think about it
Buying points is a guaranteed return, and the return is exactly the interest rate you avoid paying. That makes it unusually easy to compare against other uses of the money: a 6.75% guaranteed return is a strong one, and it is not taxed the way investment income is.
The catch is liquidity and duration. The money is gone the moment you pay it, and the return only accrues while you hold the loan. Refinancing or selling before the break-even converts the unrecovered part into a straight loss.
A rate-and-term refinance is the case where points most often disappoint. The whole point of refinancing is that rates moved; if they move again, the loan you just bought down is the one you replace.
Temporary buydowns — the 2-1 structures often paid for by a seller or builder — are a different product. They subsidise the first two years rather than lowering the rate permanently, and should be judged as a concession rather than as a rate.
Assumptions and limitations
- No tax treatment. Any deduction would improve the case; none is assumed.
- Fixed rate assumed. Buying down an adjustable-rate loan only affects the initial period.
- No prepayment beyond the schedule. Extra principal shortens the loan and therefore shortens the window over which the points earn their keep.
- Lender credits are not modelled. Negative points — a higher rate in exchange for cash toward closing costs — are the mirror image of this calculation and are not covered here.
- One quote at a time. Comparing quotes across lenders is what the Loan Comparison calculator is for.
Common mistakes
Judging points on the 30-year interest saving. It is the largest number available and almost always irrelevant, because the loan rarely lasts that long.
Assuming a point always cuts the rate by a quarter point. It is a market price, not a rule, and it changes daily.
Buying points with money needed for reserves. An illiquid guaranteed return is a poor trade against having no emergency fund.
Comparing lenders on rate alone once points are involved. A low rate bought with high points and fees can be the more expensive loan.
Frequently asked questions
One discount point costs 1% of the loan amount and buys a permanently lower interest rate for that loan. It is a prepayment of interest rather than a fee for a service, which is why the value of it depends on how long you keep the loan.
Often around a quarter of a percentage point, but it is a market price rather than a rule and it varies by lender, by day and by loan size. Always use the two rates your own lender quotes rather than a rule of thumb.
When you will keep the loan comfortably past the break-even, the cash is genuinely spare, and you would not otherwise have invested it at a higher return. Points are strongest for someone certain they are staying put and weakest for anyone likely to move or refinance within a few years.
Points paid on the purchase of a main home are often deductible in the year paid, and points on a refinance are usually amortised over the life of the loan — but only if you itemise, and conditions apply. This calculator assumes no deduction, so any benefit would improve the result.
Discount points buy down the rate. Origination points are a lender fee for processing the loan and buy you nothing. Both are quoted as a percentage of the loan, which makes them easy to confuse on a loan estimate — only the first belongs in this calculator.
That is a different product. It subsidises the payment for the first two years and then reverts to the note rate, and it is usually funded by a seller or builder as a concession. It should be judged as a short-term credit rather than as a permanent rate reduction, and it is not what this calculator models.