Mortgage Points Calculator

Created by Tibor Pal, PhD candidate
Reviewed by Dominik Czernia, PhD candidate and Jack Bowater
Last updated: Feb 02, 2022

Use the mortgage points calculator (or mortgage discount points calculator) to learn how much you could save on interest when buying points for a mortgage. In addition, you can check how long you need to wait to regain the mortgage points cost (the mortgage break-even point), so you can also apply our tool as a mortgage points break-even calculator.

In the following, you can read about:

  • The pros and cons of buying points on a mortgage;
  • How do mortgage points work;
  • How much is a mortgage point; and
  • How to calculate mortgage points.

How do mortgage points work? Pros and cons of buying mortgage points

Typically, when the general level of prices is increasing in the overall economy, central banks increase policy rates to curb inflation. One important channel of monetary policy operation is the bank lending channel, where rising policy rates increase interest rates on loans. In such periods, borrowers seek for the lowest possible interest rate on new loans, especially mortgages, where minor differences in rates can considerably affect payments and interest charges over a long stretch of time (check our mortgage comparison tool for a demonstration).

One option to lower the interest rate is to buy points on a mortgage. Paying points on a mortgage means paying additional upfront fees to your mortgage lender (or increasing the loan amount), called discount points, to get a lower interest rate and monthly payment.

While the big advantage of buying points on a mortgage is that you obtain a lower rate, regardless of your credit score, there are several aspects to consider before paying for mortgage loan points.

Considering the pros and circumstances when buying points on a mortgage can be beneficial:

  • When your income does not qualify you for a mortgage, you may be able to qualify with a reduced interest rate and payment.
  • If you have cash at hand, or if you can convince the seller to pay for the mortgage discount points.
  • When you plan to live in the same house for a long time without refinancing your mortgage (at least until you reach the break-even point).
  • If you expect rising mortgage rates.

However, there are some cons and situations where it is better not to buy points on a mortgage:

  • In case your down payment is less than 20 percent of the mortgage amount, it might be better to allocate your money towards increasing the down payment percentage to avoid possible charges of private mortgage insurance (PMI).
  • If you have other high-interest debts (for example, credit card), you may be better off if you repay it first.
  • It's always a good idea to consider the opportunity cost of the money you would spend on the mortgage points (i.e., potential investment or savings).

To sum up, it's always a good idea to check whether the money you devote to lowering mortgage rates brings higher utility in other places. Still, if you plan to stay for a long time in the purchased home, buying mortgage points might be a smart choice.

How to calculate mortgage points. The mortgage points calculator

To make the tool work, you need to provide the following parameters:

Mortgage setup

  • Original loan amount - The mortgage amount;
  • Mortgage term - The loan term;
  • Initial interest rate - Yearly rate of interest, or APR;
  • Compounding frequency - Available in the advanced mode; and
  • Due date - The date when the first monthly payment is due.

After setting the mortgage configuration, you can choose two options for comparing different scenarios of mortgage points.

Option I. and Option II.

  • Mortgage points - Upfront payment as a percentage of the loan amount;
  • Cost of mortgage points - The amount you need to pay for the mortgage points;
  • New interest rate - The discounted mortgage rate;
  • Type of payment (advanced mode) - By default, the payment is assumed to be upfront, but you may choose to roll it into the loan as well; and
  • Discount percentage (advanced mode) - You may manually set the percentage discount you gain with one mortgage point (0.25% by default).

Results

After setting all parameters, you will immediately see the results in the summary table, which you can use to compare the two different mortgage point options. The information provided includes:

  • Principal;
  • Monthly payment;
  • Monthly savings;
  • Mortgage rate;
  • Break even point;
  • Total interest; and
  • Total payments.

Balances and schedules

You can also follow the progress of mortgage balances in a dynamic chart and amortization table.

FAQ

Are mortgage points tax deductible?

Yes. Mortgage points are considered prepaid interest and may be deductible as home mortgage interest. To do so, you need to claim the itemized deductions on Schedule A of Form 1040.

How much do mortgage points cost?

Each point you buy costs 1 percent of the mortgage amount. For example, you can quickly compute the cost of a mortgage point on a $200,000 mortgage if you divide 200,000 by 100, which is $2,000.

How many points can you buy on a mortgage?

The upper limit of mortgage points depends on the mortgage lender you borrow from. While there is no official limit on how many mortgage points you can buy, one-point and three-point programs are the most common.

How much can I save by buying one mortgage point on a $300,000 mortgage?

To find how much you can save by buying mortgage points:

  1. Check the rate of your $300,000 mortgage, let's assume it is 3.25%,
  2. Decide the new interest rate you'd like, for example, 3%,
  3. In that way, you will lower the monthly payment by $40 (from $1,264.81 to $1,224.72)
  4. In the end, you would save $11,432 on interest (taking into account the upfront cost of $3,000 to buy the points)

Mortgage points calculator disclaimer

You should consider the mortgage points break even calculator as a model for financial approximation. All payment figures, balances, and interest figures are estimates based on the data you provided in the specifications that are, despite our best effort, not exhaustive.

For this reason, we created the calculator for instructional purposes only. Still, if you experience a relevant drawback or encounter any inaccuracy, we are always pleased to receive useful feedback and advice.

Tibor Pal, PhD candidate
Mortgage setup
Original loan amount
$
Mortgage term
yrs
Initial interest rate
%
Option I.
Mortgage points
Cost of mortgage points
$
New interest rate
%
Option II.
Mortgage points
Cost of mortgage points
$
New interest rate
%
Results
Option I.Option II.Difference
Principal$250,000.00$250,000.00$0.00
Monthly payment$1,054.01$987.80-$66.21
Monthly savings$34.01$100.21$66.21
Mortgage rate3%2.5%-0.5%
Break evenJun. 24, 2028 (74 months)Jul. 24, 2028 (75 months)1 month
Total interest$129,443.63$105,608.81-$23,834.82
Total payments$381,943.63$363,108.81-$18,834.82
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chart of balances
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