The key question: how long will you keep the loan?
Points are a bet on your own holding period. Before break-even, the upfront cost is larger than the payment savings accumulated so far; after it, the payment savings are ahead. Moving, selling, or refinancing ends that comparison, so use the shortest realistic horizon rather than the stated loan term.
This calculator compares the modeled principal-and-interest payment at both rates, divides the cost of the points by the monthly difference to find break-even, and shows the net savings if you hold the loan to maturity.
Reading a lender’s rate sheet
Lenders quote several rate/point combinations for the same loan. Two things to check with this tool:
- Compare like with like. Always compare the total cost of points (from the Loan Estimate, section A) against the payment difference — not the advertised “point” count, which sometimes hides origination fees.
- No fixed rate reduction. The CFPB explains that the rate change attached to one point varies by lender, loan type, and market. Enter each quoted rate-and-cost combination separately instead of assuming that every point buys the same reduction.
Points vs. the alternatives
The same cash could instead raise your down payment (which can change mortgage-insurance requirements), remain liquid, or reduce other debt. Compare the actual monthly savings, upfront cost, and effect on your liquidity. If you already have the mortgage, another option is prepaying principal: see the biweekly payment calculator for what that path saves.
Method, example, and sources
How this calculator works
The model amortizes the same principal and term at the rate without points and the quoted rate with points. It divides the entered upfront points cost by the monthly principal-and-interest savings, rounds up to the first whole break-even month, and subtracts the cost from full-term payment savings.
Worked example
For a $400,000, 30-year loan quoted at 6.75% without points and 6.5% with $4,000 of points, payments are about $2,594 and $2,528. Monthly savings are about $66, break-even is month 61, and full-term net payment savings are about $19,803.
What the estimate leaves out
- The two rates and the points cost must come from comparable offers for the same loan; the model does not normalize other lender fees or credits.
- Taxes, insurance, mortgage insurance, other closing costs, and the opportunity cost of cash paid upfront are excluded.
- The loan is held at a fixed rate for the entered term; selling, refinancing, prepaying, and tax deductibility can change the realized outcome.
Primary sources
Frequently asked questions
What are mortgage discount points?
A discount point is prepaid interest: one point costs 1% of the loan amount at closing in exchange for a lower interest rate. There is no fixed rate reduction per point; it depends on the lender, loan type, and market. Points are a trade: cash today for a smaller payment every month for the life of the loan.
How is the break-even point calculated?
Divide the cost of the points by the monthly payment savings. If one point costs $4,000 and lowers your payment by $66, you break even in about 61 months — roughly five years. Keeping the loan longer puts the payment savings ahead of the upfront cost; selling or refinancing sooner leaves them behind.
When are points a bad idea?
When you are likely to move or refinance before break-even, when the cash would deplete your emergency fund, or when the same money used as a bigger down payment would eliminate mortgage insurance. Compare the actual offers over your realistic holding period.
Are mortgage points tax-deductible?
If you itemize, qualifying points may be deductible as mortgage interest. The general rule is to deduct them over the loan term; points on a main-home purchase can sometimes be deducted in the year paid when all IRS tests are met, while refinance points are generally spread over the new loan term. Check current IRS Publication 936 or a tax professional.
Should I pay points or make a bigger down payment?
Run both numbers. A bigger down payment reduces the balance and can remove PMI at 80% loan-to-value, while points reduce the rate. Compare both lender quotes over the time you realistically expect to keep the mortgage — this calculator gives you the points side of that comparison.