Mortgage Points Break-Even Calculator

Frequently Asked Questions

How many points should I buy?

Depends on your break-even analysis and planned stay. Most lenders offer 0-3 points. Get quotes at 0, 1, and 2 points and compare break-evens to find the optimal amount.

Are points tax-deductible?

Points paid on a purchase mortgage for your primary residence are fully deductible in the year paid. Points on a refinance must be amortized over the loan life. Consult your tax advisor.

What is the difference between discount points and origination fees?

Discount points are optional prepaid interest to lower your rate. Origination fees compensate the lender for processing and do not reduce your rate. Confirm which type is being quoted.

Do points make more sense when rates are high?

Generally yes - the monthly savings from a 0.25% rate reduction are larger when the base rate is higher. But also consider that high rates increase the likelihood of a future refinance, which erases unrecouped point costs.

Can I roll points into the loan?

No - points must be paid in cash at closing. You can ask the seller to pay points as a concession (seller-paid points), effectively rolling them into the transaction. IRS rules still allow the buyer to deduct seller-paid points.

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How It Works

One discount point equals 1% of your loan amount paid upfront at closing. On a $400,000 loan, one point costs $4,000. In exchange, the lender lowers your interest rate, typically by 0.125 to 0.25 percentage points per point purchased. The break-even period is how long you must keep the loan before the cumulative monthly savings equal the upfront cost.

Break-even months = points cost divided by monthly payment savings. If you plan to sell, refinance, or pay off the loan before break-even, buying points is a net loss. If you stay past break-even, every month beyond is pure savings.

Key Metrics

Monthly savings: The difference in monthly payments between the rate without points and the rate with points, on a 30-year amortization.

Break-even months: Upfront points cost divided by monthly savings. This is the minimum required stay to come out ahead.

Net savings over stay: Cumulative monthly savings over your planned hold period minus the upfront cost. Positive means points were worth it; negative means you should have taken the higher rate.

Rate reduction per point: Typically 0.125-0.25 percentage points per discount point. The actual reduction depends on the lender and market conditions - always get a specific quote.

Tips

Compare the break-even period against your realistic expected time in the home. Most homeowners stay 7-9 years; if your break-even is 4 years, points likely make sense.

If you plan to refinance when rates drop, the unrecouped point cost from the original loan is lost. Recalculate break-even on the new loan if buying points at refinance.

Points paid on a purchase mortgage are typically deductible in full the year paid. Points on a refinance must be amortized over the loan life. Check with your tax advisor.

Negative points (lender credits) work in reverse - you accept a higher rate in exchange for a credit toward closing costs. Use the same break-even logic: how long before the higher payments cost more than the upfront credit saved?

Consider opportunity cost: $4,000 in points invested elsewhere could grow. For long stays, the rate savings usually win. For short stays, keeping the cash often makes more sense.

FAQ

How many points should I buy?

Depends on your break-even analysis and planned stay. Most lenders offer 0-3 points, with diminishing rate reductions per additional point. There is typically an optimal point (literally and figuratively) beyond which the marginal cost per rate basis point rises sharply. Get quotes at 0, 1, and 2 points and compare break-evens.

Are points tax-deductible?

Yes, but with rules. Points paid on a purchase mortgage for your primary residence are fully deductible in the year paid (for itemizing taxpayers). Points on a refinance, second home, or investment property must be amortized over the life of the loan. Consult your tax advisor for your specific situation.

What is the difference between discount points and origination fees?

Discount points are optional prepaid interest to lower your rate. Origination fees (or origination points) are lender compensation for processing the loan and do not reduce your rate. When shopping lenders, confirm whether points quoted are discount points (rate reduction) or origination fees (loan cost with no rate benefit).

Do points make more sense when rates are high?

Generally, yes. When rates are high (7-8%), the monthly savings from a 0.25% rate reduction are larger because you are saving a bigger percentage of a larger interest amount. Also, when rates are high, borrowers are more likely to refinance when rates fall, which can offset the benefit. Model your likely refinance timing explicitly.

Can I roll points into the loan?

Technically no - you cannot borrow money to buy discount points, as points must be paid in cash at closing. However, you could ask the seller to pay points as a concession (seller-paid points), effectively rolling them into the purchase transaction. Points paid by the seller are still deductible by the buyer under IRS rules.

Mortgage Points Break-Even Calculator

Frequently Asked Questions

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