Discount Point Calculator
Use this tool to understand the upfront cost of paying discount points on a mortgage and how it impacts your monthly payment and total interest paid over the loan term.
Enter the details of your loan to see the calculation.
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Understanding Discount Points
What are Discount Points?
Discount points (also known as mortgage points) are fees paid directly to the lender at closing in exchange for a reduced interest rate. Each point is typically equal to 1% of the loan amount. Paying points is essentially prepaying some of the interest on the loan upfront to lower the monthly payment and total interest over the loan's life.
How They Work
When you pay a discount point, the lender lowers the interest rate they offer. The amount the rate is reduced per point can vary significantly between lenders and market conditions, but a common estimate is that one point could reduce the rate by about 0.25%.
Calculating the Impact
The calculation involves a few steps:
- Cost of Points: This is straightforward: `Loan Amount * (Number of Points / 100)`.
- New Monthly Payment: This is calculated using the standard mortgage payment formula with the *reduced* interest rate. The formula for the monthly principal and interest (P&I) payment is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where:M= Monthly PaymentP= Principal Loan Amounti= Monthly interest rate (Annual Rate / 100 / 12)n= Total number of payments (Loan Term in Years * 12)
- Total Interest Paid: This is found by multiplying the new monthly payment by the total number of payments and subtracting the original loan amount: `(Monthly Payment * Total Payments) - Loan Amount`.
- Break-Even Point (Conceptual): The time it takes for the savings from the lower monthly payment to equal the upfront cost of the points. While this calculator doesn't explicitly solve for it, the data allows you to see the trade-off.
By comparing the scenario with and without points, you can see the monthly savings and the total savings over the life of the loan, helping you decide if paying points is worthwhile for your situation.
Discount Point Examples
Click on an example to see the inputs and results:
Example 1: Standard 1 Point on a $200,000 Loan
Scenario: You are getting a $200,000 mortgage and can pay 1 point to reduce the rate.
Inputs: Loan Amount = $200,000, Number of Points = 1, Original Rate = 7.0%, Reduced Rate = 6.75%, Loan Term = 30 years.
Expected Calculation & Results:
- Cost of Points: $200,000 * (1 / 100) = $2,000
- Monthly Payment (7.0%): ~$1330.60
- Monthly Payment (6.75%): ~$1300.47
- Monthly Savings: ~$30.13
- Total Payments (30 yrs): 360
- Total Paid (6.75%): $1300.47 * 360 = ~$468,169.20
- Total Interest (6.75%): $468,169.20 - $200,000 = ~$268,169.20
- Total Interest (7.0%): ~$278,915.10
- Total Interest Savings: ~$10,745.90
Conclusion: Paying $2,000 upfront saves you ~$30/month and over $10,000 in total interest over 30 years.
Example 2: Paying 0.5 Points on a $350,000 Loan
Scenario: Considering paying 0.5 points on a larger loan.
Inputs: Loan Amount = $350,000, Number of Points = 0.5, Original Rate = 6.5%, Reduced Rate = 6.3%, Loan Term = 15 years.
Expected Calculation & Results:
- Cost of Points: $350,000 * (0.5 / 100) = $1,750
- Monthly Payment (6.5%): ~$3059.13
- Monthly Payment (6.3%): ~$3024.16
- Monthly Savings: ~$34.97
- Total Payments (15 yrs): 180
- Total Paid (6.3%): $3024.16 * 180 = ~$544,348.80
- Total Interest (6.3%): $544,348.80 - $350,000 = ~$194,348.80
- Total Interest (6.5%): ~$199,643.40
- Total Interest Savings: ~$5,294.60
Conclusion: $1,750 upfront saves almost $35/month and over $5,200 in total interest on this 15-year loan.
Example 3: No Points (Points = 0)
Scenario: Calculate the payment and total interest without paying any points.
Inputs: Loan Amount = $150,000, Number of Points = 0, Original Rate = 7.2%, Reduced Rate = 7.2%, Loan Term = 30 years.
Expected Calculation & Results:
- Cost of Points: $150,000 * (0 / 100) = $0
- Monthly Payment (7.2%): ~$1020.30
- Total Payments (30 yrs): 360
- Total Paid (7.2%): $1020.30 * 360 = ~$367,308
- Total Interest (7.2%): $367,308 - $150,000 = ~$217,308
Conclusion: This shows the baseline cost and interest without points.
Example 4: Paying 2 Points on a $300,000 Loan
Scenario: Considering a larger investment in points.
Inputs: Loan Amount = $300,000, Number of Points = 2, Original Rate = 6.8%, Reduced Rate = 6.3%, Loan Term = 30 years.
Expected Calculation & Results:
- Cost of Points: $300,000 * (2 / 100) = $6,000
- Monthly Payment (6.8%): ~$1961.95
- Monthly Payment (6.3%): ~$1865.47
- Monthly Savings: ~$96.48
- Total Payments (30 yrs): 360
- Total Paid (6.3%): $1865.47 * 360 = ~$671,569.20
- Total Interest (6.3%): $671,569.20 - $300,000 = ~$371,569.20
- Total Interest (6.8%): ~$406,302.70
- Total Interest Savings: ~$34,733.50
Conclusion: A $6,000 upfront cost saves nearly $100/month and over $34,000 in total interest over 30 years.
Example 5: Shorter Term Loan (15 years)
Scenario: How points impact a shorter-term loan.
Inputs: Loan Amount = $250,000, Number of Points = 1, Original Rate = 6.0%, Reduced Rate = 5.75%, Loan Term = 15 years.
Expected Calculation & Results:
- Cost of Points: $250,000 * (1 / 100) = $2,500
- Monthly Payment (6.0%): ~$2109.64
- Monthly Payment (5.75%): ~$2072.67
- Monthly Savings: ~$36.97
- Total Payments (15 yrs): 180
- Total Paid (5.75%): $2072.67 * 180 = ~$373,080.60
- Total Interest (5.75%): $373,080.60 - $250,000 = ~$123,080.60
- Total Interest (6.0%): ~$129,735.20
- Total Interest Savings: ~$6,654.60
Conclusion: On a 15-year loan, points still offer savings, but the total interest saving is less compared to a 30-year loan due to the shorter term, despite a similar monthly saving.
Example 6: Small Rate Reduction Per Point
Scenario: What if paying points offers only a small rate reduction?
Inputs: Loan Amount = $220,000, Number of Points = 1, Original Rate = 7.1%, Reduced Rate = 7.0%, Loan Term = 30 years.
Expected Calculation & Results:
- Cost of Points: $220,000 * (1 / 100) = $2,200
- Monthly Payment (7.1%): ~$1482.86
- Monthly Payment (7.0%): ~$1463.12
- Monthly Savings: ~$19.74
- Total Payments (30 yrs): 360
- Total Paid (7.0%): $1463.12 * 360 = ~$526,723.20
- Total Interest (7.0%): $526,723.20 - $220,000 = ~$306,723.20
- Total Interest (7.1%): ~$313,830.50
- Total Interest Savings: ~$7,107.30
Conclusion: Even a small rate reduction (0.1% for 1 point) results in monthly and total interest savings, though the break-even point will be longer than if the reduction were larger.
Example 7: High Points, Significant Rate Reduction
Scenario: Paying a lot of points for a significant rate cut.
Inputs: Loan Amount = $400,000, Number of Points = 3, Original Rate = 7.5%, Reduced Rate = 6.5%, Loan Term = 30 years.
Expected Calculation & Results:
- Cost of Points: $400,000 * (3 / 100) = $12,000
- Monthly Payment (7.5%): ~$2796.05
- Monthly Payment (6.5%): ~$2528.15
- Monthly Savings: ~$267.90
- Total Payments (30 yrs): 360
- Total Paid (6.5%): $2528.15 * 360 = ~$910,134
- Total Interest (6.5%): $910,134 - $400,000 = ~$510,134
- Total Interest (7.5%): ~$606,578
- Total Interest Savings: ~$96,444
Conclusion: A large upfront cost provides substantial monthly and total interest savings, but you need to be sure you'll keep the loan long enough to recoup the $12,000.
Example 8: Comparing 1 Point vs. 2 Points
Scenario: Deciding between paying 1 point or 2 points.
Assume Original Rate 7.0%.
Case 1: 1 Point Paid
Inputs: Loan Amount = $250,000, Number of Points = 1, Original Rate = 7.0%, Reduced Rate = 6.75%, Loan Term = 30 years.
- Cost: $2,500
- New Rate: 6.75%
- Monthly Payment: ~$1615.59
Case 2: 2 Points Paid
Inputs: Loan Amount = $250,000, Number of Points = 2, Original Rate = 7.0%, Reduced Rate = 6.5%, Loan Term = 30 years.
- Cost: $5,000
- New Rate: 6.5%
- Monthly Payment: ~$1580.65
Comparison: Paying the 2nd point costs an extra $2,500 upfront ($5,000 - $2,500) but saves an extra ~$34.94 per month ($1615.59 - $1580.65). You'd need to keep the loan for about 72 months ($2500 / $34.94) to recoup the cost of the second point.
Conclusion: The calculator helps compare different point options by showing the resulting payments and total interest for each scenario.
Example 9: Points on a Smaller Loan
Scenario: Evaluating points for a smaller mortgage amount.
Inputs: Loan Amount = $100,000, Number of Points = 0.75, Original Rate = 7.3%, Reduced Rate = 7.1%, Loan Term = 20 years.
Expected Calculation & Results:
- Cost of Points: $100,000 * (0.75 / 100) = $750
- Monthly Payment (7.3%): ~$783.42
- Monthly Payment (7.1%): ~$770.72
- Monthly Savings: ~$12.70
- Total Payments (20 yrs): 240
- Total Paid (7.1%): $770.72 * 240 = ~$184,972.80
- Total Interest (7.1%): $184,972.80 - $100,000 = ~$84,972.80
- Total Interest (7.3%): ~$88,020.10
- Total Interest Savings: ~$3,047.30
Conclusion: Points are an option even on smaller loans, though the dollar amounts for cost and savings are proportionally smaller.
Example 10: Long-Term Benefit on a 30-Year Loan
Scenario: Highlighting the potential long-term savings on a standard 30-year mortgage.
Inputs: Loan Amount = $280,000, Number of Points = 1.25, Original Rate = 6.9%, Reduced Rate = 6.6%, Loan Term = 30 years.
Expected Calculation & Results:
- Cost of Points: $280,000 * (1.25 / 100) = $3,500
- Monthly Payment (6.9%): ~$1837.60
- Monthly Payment (6.6%): ~$1785.00
- Monthly Savings: ~$52.60
- Total Payments (30 yrs): 360
- Total Paid (6.6%): $1785.00 * 360 = ~$642,600
- Total Interest (6.6%): $642,600 - $280,000 = ~$362,600
- Total Interest (6.9%): ~$381,535.50
- Total Interest Savings: ~$18,935.50
Conclusion: Paying $3,500 upfront can save you over $18,000 in total interest over 30 years, demonstrating the long-term benefit if the loan is kept for the full term.
Common Mortgage Terms
Principal and Interest (P&I): This is the portion of your monthly payment that goes towards paying down the loan balance (Principal) and the cost of borrowing the money (Interest). It typically doesn't include taxes or insurance (escrow).
Loan Term: The scheduled length of time to repay the loan (e.g., 15 or 30 years).
APR (Annual Percentage Rate): This is a broader measure of the cost of borrowing, including the interest rate and other loan fees, expressed as a percentage.
Frequently Asked Questions about Discount Points
1. What exactly are discount points?
Discount points are fees paid to your mortgage lender at closing in exchange for a lower interest rate on your loan. One point costs 1% of your loan amount.
2. How is the cost of discount points calculated?
The cost is calculated as: Loan Amount multiplied by the Number of Points, divided by 100. For example, 1 point on a $200,000 loan costs $2,000 ($200,000 * 1 / 100).
3. Does paying points reduce my monthly mortgage payment?
Yes, because paying points lowers your interest rate, it results in a lower monthly payment for the principal and interest (P&I).
4. Does paying points save me money on total interest?
Yes, over the life of the loan, the lower interest rate achieved by paying points will result in paying less total interest compared to the loan without points, assuming you keep the loan for the full term.
5. Is it always a good idea to pay discount points?
Not always. It depends on how long you plan to stay in the home (or keep the mortgage). You need to calculate a "break-even point" – the time it takes for the monthly savings to equal the upfront cost of the points. If you sell or refinance before the break-even point, you might lose money.
6. How much does the interest rate decrease per point?
This varies by lender and market conditions. There is no standard amount, though a common rule of thumb is a 0.25% rate reduction per point. Always get quotes from your lender for the specific rate reduction offered for points.
7. Are discount points the same as origination points?
No. Discount points are paid to reduce the interest rate. Origination points are fees paid to the lender for processing the loan and are typically expressed as a percentage of the loan amount (similar calculation) but do not affect the interest rate.
8. Are discount points tax deductible?
Generally, discount points paid on a mortgage for your primary residence are tax deductible, but there are rules and limitations. Consult a tax professional for advice.
9. How does refinancing affect the benefit of paying points?
If you refinance your mortgage, you get a new loan and the old loan is paid off. If you haven't reached the break-even point on the discount points from the original loan before refinancing, you won't fully recoup their cost through monthly savings.
10. Does this calculator include other loan costs like taxes or insurance?
No, this calculator focuses on the Principal and Interest (P&I) payment and total interest based on the loan amount and interest rate. It does not include escrow payments for property taxes, homeowners insurance, or private mortgage insurance (PMI).
