Discount Point Calculator

Magdy Hassan

April 22, 2025

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Discount Point Calculator

Calculate the Discount Points on your loan.

Loan Amount ($):

Discount Points (%):

Understanding Discount Points

Discount points are a type of upfront payment made to lower the interest rate on a mortgage or loan. Each point typically costs 1% of the loan amount and can reduce the overall interest paid over the life of the loan. This tool helps borrowers determine how many discount points to purchase based on their financial goals and loan terms.

This calculator aids users in understanding the long-term financial benefits of paying points versus accepting a higher interest rate. It allows borrowers to weigh the upfront cost against potential savings, making informed decisions about their mortgage options.

The Discount Point Formula

This calculator uses the following formulae to calculate total costs and potential savings:

$$ \text{Total Loan Cost} = \text{Loan Amount} + \text{Discount Points Cost} $$ $$ \text{Total Payment Savings} = \text{Monthly Payment (Standard)} - \text{Monthly Payment (With Points)} $$ Where:

Loan Amount: The total amount of the mortgage or loan.
Discount Points Cost: The cost of each point purchased (1 point = 1% of the loan amount).
Monthly Payments: The calculated payments based on loan terms with and without points.

A positive savings result indicates that purchasing discount points reduces long-term costs.

Why Calculate Discount Points?

Cost Savings: Determine if purchasing points will save money in the long run based on individual circumstances.
Budgeting: Assess how purchasing points affects the overall financial plan, including monthly payments and upfront costs.
Comparative Analysis: Compare multiple mortgage offers side by side, factoring in points, to choose the most financially advantageous option.
Long-Term Planning: Helps homeowners understand if they plan to stay long enough to recoup the costs of points paid.

Applicability Notes

This tool is particularly useful for homeowners looking to refinance or purchase new properties. Understanding the logistics of discount points can help in making informed financial decisions that align with both short-term cash flow needs and long-term financial goals.

Example Calculations

Example 1: Standard Mortgage with Points

A borrower takes a mortgage of $300,000 with an interest rate of 4.5% and considers buying 2 discount points.

Discount Points Cost: 2% of $300,000 = $6,000
Monthly Payment without Points: ≈ $1,520.06
Monthly Payment with Points (3.75% interest): ≈ $1,389.35

Calculation:

Monthly Payment Savings = $1,520.06 - $1,389.35 = $130.71
Total Payment Savings over 30 years = $130.71 * 360 = $47,855.60

The borrower saves $47,855.60 over the life of the loan after purchasing the discount points.

Example 2: Impact of Different Points

A second borrower considers a loan of $400,000 at 4.0% interest with the option to buy 1, 2, or 3 points.

1 Point (1% cost): $4,000, Monthly Payment: ≈ $1,910.50
2 Points (2% cost): $8,000, Monthly Payment: ≈ $1,837.10
3 Points (3% cost): $12,000, Monthly Payment: ≈ $1,765.08

Calculation:

Saving with 1 Point: $1,910.50 - $1,837.10 = $73.40/month
Saving with 2 Points: $1,910.50 - $1,765.08 = $145.42/month

Purchasing 2 points leads to monthly savings of $145.42, totaling $52,125.20 over a 30-year mortgage.

Frequently Asked Questions (FAQs)

What are discount points?: Discount points are fees paid upfront to lower the interest rate on your mortgage, where one point equals 1% of the loan amount.
How do I determine if buying points is worth it?: Use this calculator to compare the upfront costs of points against your potential monthly payment savings and the duration you plan to stay in the home.
How many points should I buy?: This depends on your long-term plans and financial situation. Consider how long you plan to stay in the home and whether the resulting savings outweigh upfront costs.
Are discount points refundable?: No, discount points are generally non-refundable fees; you pay them as part of securing the loan.
Can I negotiate points with my lender?: Yes, some lenders may allow you to negotiate the number of points or fees involved with closing on a mortgage.
Do all lenders offer discount points?: Not all lenders use the same terms. Some may offer loans without points, while others might have varying fees.
How do discount points affect my credit score?: Purchasing discount points does not directly affect your credit score. However, your overall debt load and financial health can influence your score indirectly.
Can I finance the points in my loan?: In some cases, lenders might allow you to finance the cost of discount points, which can increase your loan amount and monthly payments.
Is it better to pay points or have a higher interest rate?: This greatly depends on your personal financial situation and how long you plan to stay in the home. Use the calculator to determine your break-even point.
What happens if I sell my home before breaking even on point costs?: You may not recover the cost of the points if you sell before reaching the break-even point. Evaluate your housing plan to ensure you make an informed decision.