Hong Life CalculatorsUnderstanding the mortgage points break-even calculator — concept and principle
Discount points are an upfront fee paid at closing to get a lower mortgage interest rate. One point costs 1% of the loan amount. Whether points pay off depends on how long you keep the loan. This calculator finds the break-even month, when the monthly savings have repaid the cost of the points, and the net saving if you keep the loan for the full term.
How it is calculated
- Monthly payment without points: A₁ = P × i ÷ (1 − (1 + i)^−N), with i = annual rate ÷ 12 and N = years × 12.
- New rate = original rate − points × rate cut per point; A₂ uses the same formula at the new rate.
- Points cost = P × points ÷ 100.
- Monthly saving S = A₁ − A₂; break-even = points cost ÷ S, rounded up to whole months.
- Net saving over the full term = S × N − points cost.
The rate cut per point varies by lender and market; 0.25% is a common rule of thumb, not a fixed rule.
The principle
Buying points trades cash today for lower payments later. The upfront cost is fixed, while the savings arrive month by month, so the decision is about time: once cumulative savings exceed the cost, every later month is profit. Selling the home or refinancing before break-even means the points cost more than they saved. The simple break-even ignores what the cash could have earned elsewhere; counting that opportunity cost pushes break-even later.
Worked example
Default inputs: loan $400,000, 6.5%, 30 years, 2 points, 0.25% cut per point.
- New rate: 6.5% − 2 × 0.25% = 6%.
- Payment at 6.5%: $2,528.27; at 6%: $2,398.20.
- Monthly saving: $130.07.
- Points cost: 400,000 × 2% = $8,000.00.
- Break-even: 8,000 ÷ 130.07 = 61.5, so 62 months.
- Net saving over 360 months: 130.07 × 360 − 8,000 = $38,825.20.
How to read the result
Compare the break-even month with how long you realistically expect to keep this loan. If you might move or refinance within about five years, a 62-month break-even is risky. Points are more attractive when you plan to stay long, rates are unlikely to fall, and you have spare cash after the down payment and reserves.
Common mistakes
- Comparing quotes with different points without looking at the rate each buys.
- Using a cash reserve for points and leaving no emergency fund.
- Forgetting that a refinance resets the clock and wastes unrecovered points.
- Confusing discount points with origination fees, which do not lower the rate.
Frequently asked questions
Is buying points worth it?
Usually only if you keep the loan well past the break-even month.
Are mortgage points tax deductible?
In the US they may be deductible for some home loans; see IRS Publication 936 or a tax professional.
Can I buy half a point?
Many lenders price fractional points; enter any decimal number.
Sources: Consumer Financial Protection Bureau, "What are discount points and lender credits?" · IRS Publication 936, Home Mortgage Interest Deduction