Discount Points Calculator

Paying now to pay less later

When you take out a mortgage, a lender will often offer you a deal that sounds a little strange at first: hand us some money today, and we will give you a lower interest rate for the life of the loan. Those payments are called discount points, and the trade is real, pay more up front to pay less every month for decades.

Whether that is a good trade comes down almost entirely to one question, which is how long you will keep the loan. This calculator lets you line up two versions of the same mortgage, one with points and one without, or any two point-and-rate combinations, and see which actually costs less, along with the number that settles it.

What a "point" actually is

A discount point is simply prepaid interest. One point costs 1 percent of your loan amount, paid at closing, and in return the lender shaves your interest rate down. On a 300,000 loan, one point is 3,000. On a 400,000 loan, it is 4,000.

What does that buy? As a rough industry guide, one point tends to lower a fixed rate by around a quarter of a percent, though it genuinely varies by lender and by the day, sometimes it is less. That is why the calculator asks you for the actual rate on each option rather than assuming a fixed trade. The real numbers come from your lender's Loan Estimate, which is required to show you the rate both with and without the points, so you can compare like for like.

Setting up the two options to compare

Start with the parts common to both: the loan amount and the loan term in years and months. Then describe your two choices.

For Loan Term 1 and Loan Term 2, enter the points as a percentage and the annual interest rate that comes with them. A classic comparison is zero points at a higher rate against one point at a lower rate, but you can pit any two offers against each other. The calculator then works out the monthly payment, the total cost including the points, and the total interest for each, and lays them side by side so the cheaper path is obvious.

The break-even month is the whole decision

Everything about paying points hinges on a single figure, and the calculator hands it to you: the break-even point. It is the moment your monthly savings finally add up to what you paid for the points in the first place.

The idea is simple. You spend a lump sum today, and in exchange you save a certain amount each month. Divide the cost of the points by that monthly saving and you get the number of months it takes to get your money back. Before that month, you are still in the red on the deal. After it, every lower payment is pure gain. So the whole question becomes: will you still have this loan when the break-even month arrives, and for a good while after? If yes, points pay off. If you are likely to sell the house or refinance the loan before then, you will have paid for a discount you never fully collected.

A worked example: one point on a $400,000 loan

Take a 400,000 loan over 30 years. Option one comes with no points at a rate of 6.5 percent. Option two offers 6.25 percent, but it costs you one point, which is 4,000 up front.

That quarter-point cut drops the monthly payment from about 2,528 to about 2,463, a saving of roughly 65 a month. To earn back the 4,000 you paid, you divide 4,000 by that 65, which comes to about 61 months, or just over 5 years. Stay in the loan longer than five years and the point was a good buy. In fact, if you saw the full 30 years out, the lower rate would save you somewhere near 19,500 in total. But move or refinance inside those first five years, and you would have been better off keeping your 4,000. The break-even is the line between the two outcomes.

When points make sense, and when your cash is needed elsewhere

Points reward patience. They make the most sense when you are settling in for the long haul, confident you will hold the loan well past the break-even point, and when you have the cash to spare without stripping your reserves. If that is you, buying down the rate can save real money over the years.

But that same cash often has a better job to do, and this is where a lot of people get it wrong. If your down payment is below 20 percent, using the money to push it up to 20, and shed private mortgage insurance, usually beats buying points. If you are carrying credit card debt at 20 percent or more, paying 4,000 to save 65 a month makes little sense next to clearing debt that is costing you far more. And if the points would drain your emergency fund, keep the cash, because liquidity when something goes wrong is worth more than a slightly smaller mortgage payment. It is also worth a sober note that lender research has found the actual rate difference points buy is often smaller than people assume, so it always pays to check the real numbers, which is what this tool is for.

A note on taxes

There is a tax angle that can tilt the maths in favour of points. Because points are prepaid interest, they may be tax deductible. On a loan to buy your main home, points can often be deducted in full in the year you pay them, while points paid to refinance are usually spread across the life of the loan. The rules have conditions, and everyone's situation differs, so treat this as a reason to ask a tax professional rather than a promise. If the deduction applies to you, it effectively lowers the real cost of the points and shortens your break-even.

One thing to watch on a quoted rate

A quick piece of self-defence. A rate that looks unusually sharp in an advert or an early quote sometimes has points already baked into it, quietly assumed, which makes it look more competitive than a no-points rate would. Regulators have flagged this exact practice. So when you are handed a rate, ask the plain question: does this include any points? And ask to see the rate both with and without them. Comparing a with-points rate at one lender against a no-points rate at another is not a fair fight, and it is an easy way to end up paying for a discount you did not realise you were buying. This calculator is an educational estimate to help you weigh the choice, not a substitute for the figures on your actual Loan Estimate.

Questions people ask

How much does one point cost, and what does it save?

One point costs 1 percent of your loan amount, paid at closing. It typically lowers a fixed rate by around a quarter of a percent, though the exact reduction varies by lender. Always use the real rate your lender quotes for each option.

How do I know if points are worth it?

Find the break-even month, which is the point cost divided by your monthly saving. If you will keep the loan comfortably past it, points pay off. If you might move or refinance before then, they usually do not.

What if I refinance later?

Refinancing effectively ends the old loan, so if it happens before your break-even month, you will not have recouped the cost of the points. Since many people refinance within a few years, a longer break-even is a real risk to weigh.

Should I buy points or make a bigger down payment?

If your down payment is under 20 percent, raising it to 20 to remove private mortgage insurance usually beats buying points. Points tend to make sense only once that and your emergency savings are already handled.

References

The point cost and break-even math are standard. The guidance on how points work, and how they are taxed, comes from the sources below.

1. Consumer Financial Protection Bureau. Discount points and lender credits, and what to know before paying points. https://www.consumerfinance.gov/ask-cfpb/what-are-discount-points-or-points-en-136/
2. Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction (deductibility of points). https://www.irs.gov/publications/p936
3. Freddie Mac. Primary Mortgage Market Survey (mortgage rate and points benchmarks). https://www.freddiemac.com/pmms