Mortgage Points Calculator: Should You Buy Points?

What mortgage points are

A discount point is prepaid interest. You pay 1 percent of the loan amount at closing and the lender lowers your rate, typically by about 0.25 percentage points per point, though the exact trade varies by lender and by day. On a $400,000 loan, one point costs $4,000.

Buying points is a bet on time. You pay cash now to save a little every month. If you keep the loan long enough, you win. If you sell or refinance early, the lender keeps the upfront money and you never earn it back.

Do not confuse discount points with origination points, which are a fee for making the loan and do not lower your rate. Both appear on page 2 of your Loan Estimate, section A.

Two ways to find the break-even

Simple break-even = points cost ÷ monthly payment saving. This is what most calculators show and what lenders quote.

True break-even is the first month when points plus interest paid on the lower-rate loan fall below the interest paid on the no-points loan. It usually arrives sooner, because a lower rate means more of every payment goes to principal. The payment saving understates your real gain. This calculator shows both, plus your total cost of borrowing (points + interest) if you sell or refinance at 5, 7, 10, or 30 years, and marks the cheapest option at each.

Worked example: $400,000 at 7%, 6.75%, or 6.5%

No points at 7 percent: $2,661.21 a month. One point ($4,000) for 6.75 percent: $2,594.39, saving $66.82 a month. Two points ($8,000) for 6.5 percent: $2,528.27, saving $132.94.

Simple break-even: $4,000 ÷ $66.82 = 59.9 months for one point, and $8,000 ÷ $132.94 = 60.2 months for two. True break-even for both is month 48, a full year earlier.

Total cost of borrowing (points + interest paid) at 5 years: $136,199 with no points, $135,166 with one, $134,140 with two. At 10 years: $262,595, $256,531, and $250,497. Keep the loan all 30 years and two points save $39,858 over no points.

So the question is not whether the math works. It is whether you will still have this exact loan in four years. The average US mortgage is refinanced or paid off through a sale well before its 30-year term, often within 5 to 10 years, and a rate drop of even 1 percent can make refinancing attractive and wipe out the points you paid.

When buying points makes sense

You plan to stay put for longer than the break-even, ideally with a margin of a few years. You do not expect rates to drop much; if they fall, you would refinance and lose the points. You have cash left over after the down payment, closing costs, and an emergency fund. Draining reserves to buy points is a bad trade; a 20 percent down payment that avoids PMI usually beats points.

Seller or builder credits change the math. If someone else is paying closing costs, using the credit to buy points is often the best use of money that would otherwise go unused. Also compare against a temporary 2-1 buydown, which lowers the rate for only the first two years.

Tax angle: points paid on a loan to buy your main home are generally deductible in the year paid, but only if you itemize. Points on a refinance are usually deducted over the life of the loan. Most buyers take the standard deduction, so do not count on the tax savings.

Common mistakes

Comparing Loan Estimates with different point levels without noticing. One lender's lower rate may include 1.5 points of cost. Line them up at the same points or use this calculator.

Assuming 0.25 percent per point. Some days a point buys 0.125 percent, and some days 0.375 percent. Use the actual rates your lender quotes.

Ignoring the refinance risk. If you think rates will fall, points are the most expensive way to lock in today's rate.

Counting only the payment saving. The real saving includes faster principal paydown, which is why the true break-even is shorter.