# Mortgage Points Calculator

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Our mortgage points calculator determines the break-even point, cost of purchasing the points, and the total savings if the borrower purchases mortgage points. Mortgage discount points can be a useful method in reducing your mortgage rate which in turn reduced your monthly mortgage payment. The following information is required from you: mortgage loan amount, loan term, current mortgage rate, and the number of points you are intending to buy.

Inputs
\$
%
Results
Interest saved
\$11,432
over 30 years
with new mortgage rate
2.75
%
Break-Even Period
4
years
2
months
Cost of Points
\$
3,000

### What You Should Know

• Mortgage points are optional purchases that can reduce your mortgage rate for a fee
• The cost of a mortgage point is equivalent to 1% of your loan amount
• A mortgage point on fixed-rate mortgages reduces your mortgage rate by 0.25% and for an adjustable-rate mortgage, it reduces it by 0.375%
• You should consider purchasing mortgage points if you do not plan to sell the house or refinance the mortgage before the break-even point is reached
• Negative points or rebate points allow a borrower to avoid paying for some of the closing costs upfront by charging them a higher interest rate

## Using the Calculator

To see how each component of the calculator will impact the amount of interest mortgage points will save you, it is important to first understand what each component means.

### Inputs

Mortgage Amount - Your mortgage amount is the amount that you borrow from the lender and it has a direct effect on the cost of points, the total interest you will end up saving by purchasing a mortgage point, and the break-even point. The points will cost more if you have a bigger mortgage amount.

Length of Loan - Also called the mortgage term, it is the time during which you will be paying back the mortgage. The mortgage term impacts your monthly mortgage payment and the interest you will save. The shorter the length of the loan, the less beneficial the mortgage points will be for you.

Interest Rate - Depending on your current mortgage rate, the new rate will be determined after deducting the mortgage points that you purchase.

Number of points - The number of points will decide how much your interest rate will lower by, the cost of the points, the interest saved and the break-even point. The calculator assumes that one mortgage point lowers the given interest rate by 0.25%.

### Outputs

Interest Saved - This component is calculated by comparing the monthly mortgage payment that you would make with your original interest rate versus the mortgage payment with the lower mortgage rate after purchasing the points.

Break-Even Period - The break-even period is the time it will take for the savings provided by the mortgage points to surpass the initial cost of the points. This is calculated by dividing the cost of points by the monthly savings generated.

Cost of Points - The calculator assumes that 1 mortgage point costs 1% of the mortgage amount. Therefore for a mortgage of \$300,000, one mortgage point would cost \$3,000. The cost of points will have an impact on the break-even period.

## What are mortgage points?

Mortgage points are optional purchases that can help reduce your mortgage rate. They are fees paid to the lender at closing in order to get a smaller monthly mortgage payment. It is a trade-off between paying funds upfront versus paying interest in the future. This type of mortgage point is a mortgage ‘discount point’ and it is known as ‘buying down the rate’.

The second type of mortgage point is the mortgage origination points. Mortgage origination points are fees paid to the lender for the services they provide in processing your mortgage. This can include all the paperwork, credit work, and quality service.

## How much is a mortgage point?

One mortgage discount point is 1% of the mortgage loan amount and reduces the current mortgage rate by 0.25%. For example, if you have a mortgage amount of \$250,000 and a mortgage rate of 3.5%, then one point will cost you \$2,500 and reduce your mortgage rate to 3.25%.

Mortgage origination points also cost approximately 1% of the loan amount. This fee can be negotiated with the lender if you have a good income and credit score. You can also shop for multiple lenders and try to get the best deal.

## How do mortgage points work?

Purchasing mortgage points can reduce your mortgage rate which in turn will reduce your monthly mortgage payment. A lower mortgage payment means a smaller amount of interest being paid resulting in the savings from purchasing the points. For example, on a \$400,000 home with a 30-year fixed-rate mortgage:

No Points1 Point2 Points
Loan Amount\$400,000\$400,000\$400,000
Mortgage Rate4%3.75%3.5%
Points Cost-\$4,000\$8,000
Monthly Payment\$1,910\$1,850\$1,460
Monthly Payment\$1,910\$1,850\$1,460
Total Interest\$287,480\$266,885\$246,625

As shown in the example above, if you buy 1 mortgage discount point for \$4,000, over the 30-year mortgage you will save \$20,595 because of the lower monthly payment of \$1,850. If you choose to buy 2 mortgage points you spend more upfront, \$8,000, however, over the mortgage you can save \$40,855!

## Breakeven period on discount points

As mentioned earlier, discount points create interest savings by offering you a smaller monthly mortgage payment. The point in time when the accumulated savings generated equal the initial cost of the points is called the breakeven point. The breakeven point helps us determine whether purchasing discount points is a good idea.

To calculate the breakeven period of your mortgage points, or the amount of time it will take for you to make back what you paid for the points, we will need to know the cost of the points and the monthly savings. For example, if you paid \$4,000 on 2 mortgage points, that will end up generating you \$100 of savings every month, and so your breakeven period will be equal to \$4,000/ \$100 = 40 months, or 3 years and 4 months. After 3 years and 4 months, your total interest savings will start being more than the initial cost of the mortgage points.

It is important to note that the technique used above is a simplified estimation of the break-even point. To find the exact answer, we would have to also take into account the differences in the loan balances for different home loan options.

## Are mortgage points worth it and should I buy them?

The debate whether mortgage points being worth it comes down to the individual borrower and their needs. Whether you should purchase mortgage points depends on two major factors:

1. Affordability: If you cannot afford mortgage points after paying for the down payment and closing costs then you should not purchase mortgage points. However, if you have met your down payment needs and have funds left over, you can consider getting mortgage discount points.
2. Break-Even Point: The break-even point is the period when the savings from the mortgage points cover the costs of the points. For example, if the mortgage points fee is \$3,000 and the monthly payment is reduced by \$50, it will take 60 months (\$3,000/50) or 2.5 years to break-even. If you do not sell or refinance your home within 2.5 years, mortgage points will save you money.

### Scenarios when it makes sense to purchase mortgage points

Scenario 1

You plan to stay in the home forever - If you do not plan to move or sell your home at some point in the future, then purchasing mortgage points would generate you savings throughout the life of your mortgage. Therefore it makes sense to invest in them.

Scenario 2

You have sufficient funds - As mentioned earlier, affordability is one of the two factors to consider when contemplating whether to purchase mortgage points. If you have made a large down payment and still have some funds leftover, then purchasing mortgage points to lower your mortgage rate can be worth it.

Scenario 3

You plan to keep the mortgage for longer than the break-even point - If you refinance your mortgage before the break-even point, then the mortgage points will end up costing you more than what you will save in total. Therefore, only if you are certain that you will keep the mortgage even after the break-even point, should you purchase mortgage points.

Scenario 4

Monthly savings are significant - If purchasing mortgage points has a significant impact on your monthly savings, then it is worth considering buying them. However, if the savings are so insignificant that they don’t make a difference on your monthly budget, then purchasing them may simply not be worth it.

## ARMs and Mortgage Points

So far, we have considered the mortgage points’ impact on fixed-rate mortgages. Turning our attention to adjustable-rate mortgages, mortgage points in this case lower the interest rate by 0.375%. However, there’s a catch. The lower mortgage rate provided can be applied only in the introductory period of the adjustable-rate mortgage. This means that after the introductory period, the discount will no longer be applied to your mortgage rate.

This has certain implications on whether you should purchase mortgage points on adjustable-rate mortgages. Not only should the break-even point be before the time you plan to refinance the loan, but it should also be less than the introductory period of the loan, or else it wouldn’t make sense to purchase. For example, if the introductory period on your mortgage is 5 years, then your break-even point should be less than 60 months.

ARM vs FRM - Mortgage Points
FRMARM
How much does a mortgage point lower the interest rate?0.25%0.375%
For how long is the discount applied?Throughout the life of the loanThroughout the introductory period
The break-even point should be:Less than the time you plan to refinance the mortgage or sell the houseLess than the introductory period and the time you plan to refinance the mortgage or sell the house

## Negative Points

Negative points are the opposite of discount points. In the case of negative points, the lender pays the borrower an amount of money so that the borrower can afford the closing costs of the loan. In return for this sum of money, the borrower pays the lender a higherinterest rate. Negative points basically serve to “include” closing costs into the interest rate charged to the borrower. The difference in interest the borrower pays over time will serve to cover their initial closing costs.

With discount points, you pay the lender in order to get a lower interest rate, while with negative points, the lender pays you to charge a higher interest rate. Discount points are not worth it if you sell or refinance your mortgage before the break-even point. In contrast, if you sell or refinance your loan before the lender has earned back the closing costs in the form of interest from charging you negative points, you end up getting the winning end of the bargain.

It is also worth noting that negative points cannot be put towards your down payment. They can only be used to cover the closing costs of the loan, such as loan origination fees, title fees, appraisal fees, etc.

## Origination Points

Origination points are fees that the lender charges to originate and process a new loan application. Origination fees serve to cover the cost of maintaining a mortgage and account for the risk of the loan being pre-paid by the borrower. Loan origination fees are typically 1% of the loan amount or 1 origination point. Contrary to discount points, loan origination fees are not tax deductible.

## Mortgage Points - FAQ

Are mortgage points tax deductible?

Mortgage points are considered prepaid interest on your mortgage. As such, they are tax deductible in the year in which you pay for them. You will have to itemize your deductions in order to include mortgage points when filing your income taxes.

In order to deduct your mortgage points in full, you must also meet the following 9 requirements set by the IRS:

1. Your main home secures your loan (your main home is the one you live in most of the time).
2. Paying points is an established business practice in the area where the loan was made.
3. The points paid weren't more than the amount generally charged in that area.
4. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.
5. The points paid weren't for items that are usually listed separately on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
6. The funds you provided at or before closing, including any points the seller paid, were at least as much as the points charged. You can't have borrowed the funds from your lender or mortgage broker in order to pay the points.
8. The points were computed as a percentage of the principal amount of the mortgage, and
9. The amount shows clearly as points on your settlement statement.
Can you negotiate on your points?

Yes! Lenders are usually willing to offer better deals on their mortgage points to borrowers with high credit scores and income. Therefore, if you are considering purchasing mortgage points, it is worth shopping around and comparing deals from different lenders. Keep in mind that sometimes lenders include mortgage points when they advertise their rates. It is important to ask what the mortgage rate is without any points included.

Can you buy discount points after closing?

Unfortunately once the deal is closed and you have signed all the closing documents, the terms of the mortgage cannot be negotiated, including the discount points.

Can I finance my mortgage points?

Yes, you can finance or roll over the cost of your mortgage points into your mortgage balance. However, this would in turn result in a higher loan amount and ultimately in a significantly longer break-even period. This longer break-even period would mean that you would have to live in the house or wait to refinance your loan for a longer period of time in order to make the points purchased worth it.