Lender Point Break-Even Calculator
This tool helps you determine if buying down your mortgage rate with "lender points" is a good financial decision for you.
Enter your loan details and the terms of the point purchase. The calculator will find the break-even point—the time it takes for your monthly savings to pay back the upfront cost of the points.
Enter Your Loan & Point Information
Understanding Lender Points & Break-Even Analysis
What Are Lender Points?
Lender points, also known as "discount points," are a type of prepaid interest. You pay an upfront fee to the lender at closing in exchange for a lower interest rate on your mortgage for the entire loan term. One point typically costs 1% of the total loan amount.
What is the Break-Even Point?
The break-even point is the specific moment in time when the total amount you've saved from your lower monthly payments equals the initial amount you paid for the points. If you plan to keep the mortgage longer than the break-even period, you start saving money. If you sell or refinance before this point, you lose money on the deal.
Formula for Monthly Mortgage Payment (M)
This calculator uses the standard formula to find the monthly principal and interest payment:
M = P [ i(1 + i)^n ] / [ (1 + i)^n - 1 ]
- P: The principal loan amount.
- i: The monthly interest rate (your annual rate divided by 12).
- n: The number of payments over the loan's lifetime (term in years multiplied by 12).
10 Real-World Examples
['title' => 'The Clear "Worth It" Case', 'scenario' => 'A homebuyer is certain they will stay for a long time and gets a good offer.', 'inputs' => 'Loan: $500,000, Term: 30 Yrs, Original Rate: 7.0%, New Rate: 6.5%, Points: 1.5', 'cost' => '$7,500', 'savings' => '$171.74', 'breakeven' => '3 years, 8 months', 'conclusion' => 'This is an excellent deal. The break-even point is short, leading to significant long-term savings.'], 2 => ['title' => 'The "Not Worth It" Case', 'scenario' => 'A small rate reduction for a high point cost, common for people who might move soon.', 'inputs' => 'Loan: $300,000, Term: 30 Yrs, Original Rate: 6.5%, New Rate: 6.375%, Points: 1', 'cost' => '$3,000', 'savings' => '$23.49', 'breakeven' => '10 years, 8 months', 'conclusion' => 'This is a bad deal. It would take over a decade to recoup the cost, which is too risky.'], 3 => ['title' => 'High Loan Amount Scenario', 'scenario' => 'A buyer in a high-cost-of-living area considers buying points.', 'inputs' => 'Loan: $950,000, Term: 30 Yrs, Original Rate: 6.25%, New Rate: 6.0%, Points: 1.25', 'cost' => '$11,875', 'savings' => '$162.24', 'breakeven' => '6 years, 1 month', 'conclusion' => 'This is borderline. A 6-year break-even requires a strong commitment to staying in the home without refinancing.'], 4 => ['title' => '15-Year Mortgage Comparison', 'scenario' => 'A financially savvy borrower opting for a shorter loan term.', 'inputs' => 'Loan: $400,000, Term: 15 Yrs, Original Rate: 6.0%, New Rate: 5.75%, Points: 1', 'cost' => '$4,000', 'savings' => '$55.67', 'breakeven' => '6 years', 'conclusion' => 'Even with a 15-year term, the break-even is long. It might be better to use the $4,000 for an extra payment instead.'], 5 => ['title' => 'Aggressive Point Buy-Down', 'scenario' => 'A buyer with extra cash wants the lowest possible monthly payment.', 'inputs' => 'Loan: $450,000, Term: 30 Yrs, Original Rate: 7.0%, New Rate: 6.25%, Points: 2.5', 'cost' => '$11,250', 'savings' => '$260.67', 'breakeven' => '3 years, 7 months', 'conclusion' => 'Excellent deal. Despite the high upfront cost, the large rate reduction creates a very short break-even period.'], 6 => ['title' => 'Refinancing Decision', 'scenario' => 'A homeowner wants to refinance to a much lower rate and is offered points.', 'inputs' => 'Loan: $350,000, Term: 30 Yrs, Original Rate: 7.5%, New Rate: 6.5%, Points: 1', 'cost' => '$3,500', 'savings' => '$217.16', 'breakeven' => '1 year, 4 months', 'conclusion' => 'Fantastic deal. When refinancing results in large savings, the break-even on points can be extremely fast.'], 7 => ['title' => 'Fractional Points Scenario', 'scenario' => 'Lenders often offer points in fractions for minor rate adjustments.', 'inputs' => 'Loan: $300,000, Term: 30 Yrs, Original Rate: 6.625%, New Rate: 6.5%, Points: 0.375', 'cost' => '$1,125', 'savings' => '$23.63', 'breakeven' => '4 years', 'conclusion' => 'A reasonable deal. The low upfront cost makes the 4-year break-even period attractive for many buyers.'], 8 => ['title' => 'First-Time Homebuyer on a Budget', 'scenario' => 'A buyer has limited cash for closing and needs to decide if points are worth it.', 'inputs' => 'Loan: $250,000, Term: 30 Yrs, Original Rate: 6.875%, New Rate: 6.625%, Points: 1', 'cost' => '$2,500', 'savings' => '$38.93', 'breakeven' => '5 years, 4 months', 'conclusion' => 'Maybe not. The cash might be better used for moving expenses or furniture. The break-even period is quite long.'], 9 => ['title' => 'Jumbo Loan Considerations', 'scenario' => 'For large loans, even small rate changes have a big impact.', 'inputs' => 'Loan: $1,200,000, Term: 30 Yrs, Original Rate: 6.125%, New Rate: 5.875%, Points: 1.5', 'cost' => '$18,000', 'savings' => '$359.13', 'breakeven' => '4 years, 2 months', 'conclusion' => 'This is a good deal. The significant monthly savings justify the high upfront cost over a reasonable period.'], 10 => ['title' => 'The "No-Cost" Refinance Trap', 'scenario' => 'A lender offers a "no-cost" refinance but the rate is higher (equivalent to negative points).', 'inputs' => 'Loan: $400,000, Term: 30 Yrs, Original Rate: 6.25% (market), New Rate: 6.75% (offered), Points: 0', 'cost' => '$0', 'savings' => '-$136.21 (a loss)', 'breakeven' => 'Never', 'conclusion' => 'This shows why a higher rate is a permanent cost. The calculator confirms that a higher rate never "breaks even".'], ]; $ex = $examples[$i]; ?>Example :
Scenario:
1. Inputs:
2. Upfront Cost:
3. Monthly Savings:
4. Break-Even Point:
Conclusion:
Frequently Asked Questions (FAQs)
1. What are lender points?
Lender points (or discount points) are fees paid directly to the lender at closing in exchange for a reduced interest rate. It's a way to pre-pay interest to lower your monthly payments.
2. How much does one point cost?
One point costs 1% of your total loan amount. For example, on a $400,000 loan, one point would cost you an additional $4,000 at closing.
3. What is the "break-even point"?
It's the amount of time it will take for your accumulated monthly savings (from the lower interest rate) to equal the upfront cost of the points. It's the most important factor in deciding if points are worth it.
4. When is paying for points a good idea?
It's generally a good idea if you are certain you will stay in your home and not refinance for a period longer than the break-even point. A shorter break-even period (e.g., under 5 years) is usually considered favorable.
5. When is paying for points a bad idea?
It's often a bad idea if you think you might sell the home or refinance the mortgage before reaching the break-even point. In that case, you won't have saved enough to cover the initial cost of the points, resulting in a net loss.
6. Are discount points the same as origination points?
No. Discount points (which this calculator analyzes) are optional and buy down your rate. Origination points are fees a lender charges for creating and processing the loan; they are often not optional and do not affect your interest rate.
7. Are lender points tax-deductible?
In many cases in the U.S., points paid on a mortgage for your primary home are tax-deductible in the year you pay them. However, tax laws are complex. Always consult a qualified tax professional.
8. Why does the calculator need both interest rates?
The entire calculation is a comparison. It compares the monthly payment of the loan *without* points (at the original rate) to the payment *with* points (at the new, lower rate). The difference is your monthly savings, which is the key to finding the break-even point.
9. Does paying points reduce my principal loan balance?
No. The cost of points is an upfront closing cost, paid out-of-pocket (or sometimes with seller credits). It does not reduce the principal amount you are borrowing.
10. What's a good break-even period?
There's no single answer, but a common rule of thumb is that a break-even period of 5 years or less is often considered good. A period over 7-8 years is generally considered risky, as life circumstances are more likely to change over that timeframe, potentially leading to a sale or refinance.
