Mortgage points calculator
Mortgage Points Calculator - Are Discount Points Worth It?
This is what you can save
$73
$26,343
Calculation details
$5,000
48 months
$1,267
$206,017
$1,194
$179,674
Buying a home presents so many options that it can be hard to make the right decisions about the loan you are looking for. One of those options is paying points. By paying points on your mortgage, you lower the overall cost of your monthly mortgage payment because you are paying some of the interest ahead of time. Points are paid up front and represent a portion of your mortgage interest. If you pay points, you pay a one-time fee to reduce the initial interest rate on your loan. Should you use them? Perhaps they are right for you, but they may not be. A mortgage points calculator can help you see whether this is a good decision for you or whether your money is better used for something else.
How Mortgage Points Work
One of the first things you need to do is understand how points affect your interest rate and your mortgage in general. Points stand for a percentage of your loan: one point is equal to one percent of your total loan. Here's an example. Say you have a loan of $200,000. One point on that loan would be $2000. By paying that $2000 up front at the time of your loan signing, you are paying one point and reducing your interest rate by about .25 percent.
Should You Pay Points On Your Loan?
A key factor in deciding whether to use points is understanding your overall goals in buying a home. For many, buying a home means paying on a loan for a set number of years and owning the home free and clear after that time. For others, it is just a stepping stone to a different home, or perhaps even an investment. If you plan to live in your home for the long haul, paying points at the beginning of your loan term can matter a great deal. In fact, it can save you a good amount over the life of your loan.
On the other hand, if you plan to live in your home for less than four years, it may not make sense to put extra money into the interest on your home. This payment goes toward the interest only, not the principal, so think seriously before putting your money toward interest through points.
How a Mortgage Points Calculator Helps
A good way to learn whether you will do well by investing your money in points to lower your interest rate is to use a mortgage calculator designed for point considerations. Here is an example of how this information can help you find the best loan for you.
If you are borrowing money, consider these terms. You'll adjust them to match your own current situation, of course.
Original interest rate you qualify for: 6.5%
New interest rate with points discounted: 6%
Discount points: 2
Total amount that you are borrowing: $250,000
Term of your loan:
30 years
With this information, you can get these results. First, your original rate would cost you about $1580 per month in a payment. If you did provide for two points, then this number is reduced to $1500 per month in payments. But, is this a good idea? While it saved you over $80 in your monthly payment, in order to make this money back, you would have to be in the home for at least 62 months or over 5 years. If you plan to do that, then it makes sense to invest in the points as defined here.
Of course, it is very important to figure in your own information here. The cost of the home you are purchasing is an important factor in determining how much a point will cost you: the higher it is, the more you will have to pay to discount the rate at all. You also have to consider the interest rate you qualify for based on your credit score and financial situation. The right term matters as well in determining whether points are a good decision for you, or possibly are not.
Should You Do It?
While only you can make the decision about paying points, take the time to figure out other costs, too. For example, answer these questions for yourself.
- Do you have the funds to put into points available at the time of setting up the loan? If you'll need those funds for moving or repairs on the home, the money may be better placed in your home at that time.
- Does it make more sense to put your funds toward a down payment or closing costs instead of folding these into your loan?
- Will you still have money set aside as a backup for emergencies? This is especially important if you are depleting your savings account to pay points.
Take the time to use a mortgage calculator to answer these questions, and weigh your decision from both angles. This will ultimately help you determine the more affordable solution for your needs. For many people, the end result is finding an affordable loan that also meets their overall goals for monthly payments. Realize, too, that you still need to qualify for a loan interest rate, which may shift your calculations some. Use a mortgage points calculator to find out what your options are. It is the best way to learn whether a loan is right for you, one way or the other.
Frequently asked questions
What are mortgage discount points?
Discount points are an upfront fee you pay the lender to lower your interest rate. One point typically costs 1% of the loan amount and buys a small reduction in the rate.
How do I find my break-even point?
Divide the cost of the points by the monthly payment savings to estimate how many months it takes to recoup the expense. This calculator does that math and shows your break-even timeline.
Is buying points worth it?
It depends on how long you keep the loan. If you stay past the break-even point, the lower rate saves money. If you sell or refinance sooner, you may not recover the upfront cost.
How much does one point lower my rate?
The rate reduction per point varies by lender and market conditions, but a fraction of a percentage point is typical. Enter the offered rates to see the exact payment difference for your loan.
Are discount points tax deductible?
Points paid to lower the rate on a home purchase may be deductible if you itemize, sometimes in the year paid. Rules vary, so confirm your situation with a tax professional.
