Mortgage Points Calculator: How much can you save by buying down the rate?

Mortgage points FAQ

• What are points on a loan?
• How do mortgage discount points work?
• What the mortgage points calculator tells you
• How to use our mortgage points calculator
• How much do mortgage points cost?
• Are mortgage points tax deductible?
• When will you break even on mortgage points?
• Mortgage points & APR: What you need to know
• Mortgage points pros and cons
• When should you buy mortgage points?
• Start saving on interest with mortgage points

What are points on a loan?

Mortgage points are credits you can purchase from your lender to lower your interest rate when you take out a new home loan or refinance an existing one. Lenders may refer to these credits as mortgage points, mortgage discount points, lender credits or even simply “points,” but the basic concept will alway remain the same.

You pay your lender extra money up front — on top of your closing costs and down payment — and in return, they will reduce your interest rate. As such, purchasing mortgage points is also known as “buying down the rate.”

Mortgage discount points may cost you more in the short term, but will reduce the total amount you pay in interest over the entire life of your home loan. Your mortgage payments will also go down because you’re paying less interest each month.

How do mortgage discount points work?

When you close on a home loan — either for a new purchase or a refinance — you have the option to buy mortgage points from your lender. For every point you purchase, your lender will lower your mortgage rate by a certain percentage point. Usually, that figure is one-quarter of a percentage point, but the exact number will vary by lender.

You don’t necessarily need to buy points in whole increments either. You could buy half of a point or even one-third of a point. You can also purchase multiple points if you like.

If you choose to go this route, the price of your mortgage points will be rolled into your closing costs. Your loan agreement will then reflect the change in your interest rate. In some ways, buying down the rate can be seen as prepaying interest on your home loan, but you may actually spend less on your mortgage by paying more upfront.

What the mortgage points calculator tells you

Paying points on a mortgage may not always be the best solution for you depending on your loan terms and personal finances. Our mortgage points calculator helps you determine if buying down the rate makes sense in your situation.

In particular, use this discount points calculator to find out:

• How much you can reduce your interest rate by buying points
• How much you’ll save in interest over your entire loan
• How much you’ll save each month on interest
• When you’ll break even on your mortgage points

With that information in hand, you can make a more informed decision about purchasing mortgage points. When mulling over your options, it’s best to consult a mortgage professional who can review your financial situation and long-term plans to find the right loan terms to match your needs.

How to use our mortgage points calculator

Figuring out the potential financial benefit of buying down the rate is relatively easy. Just follow these quick and simple steps to get the most out of our discount points calculator:

1. Fill out your loan terms before paying mortgage loan points
2. Put in your loan terms after paying mortgage loan points
3. List your home loan as a fixed rate or adjustable rate mortgage
4. Review your mortgage points calculator results

1. Fill out your loan terms before paying mortgage loan points

First, you’ll need to put your original loan terms into the mortgage points calculator under the column marked “Less points.” These are the terms of your home loan before buying down the rate. Go through every field and make sure each one is 100% accurate and up to date:

• Loan amount: The total amount you’re borrowing from your lender
• Loan term: The length of your loan in years
• Interest rate: Your mortgage rate
• Origination charge: The fee your lender charges for originating your loan
• Charge for specific interest rate: The amount you’ll pay for your mortgage points
• Other settle services: Additional fees covering services provided by third parties (notary, land survey or escrow fees, for instance)

2. Put in your loan terms after paying mortgage loan points

Now, fill in the same information for your home loan after you’ve purchased discount points. You’ll find the fields listed under the “More points” column. Note that the loan amount, origination charge and settlement services will likely remain the same after you’ve bought mortgage or refinance points, so you may not need to change those fields.

However, the “Charge for specific interest rate” and “Interest rate” rows should change, since the first field reflects how much you’ll spend on mortgage points and the second represents your new, lower mortgage rate.

You may also notice that this section has several more inputs for you to include:

• State and federal tax rate: Your income tax rate
• Purchase price: The amount you’re paying the seller for your home
• Yearly property tax: The amount (not rate) of your annual property taxes that you pay
• Yearly property insurance: The amount you spend on your homeowners insurance premiums each year
• Years before you sell or pay off loan: How much time is left on your mortgage
• Your savings rate: The yearly interest rate you earn on your savings

3. List your home loan as a fixed rate or adjustable rate mortgage

Mortgage points work differently if you’re taking out an adjustable rate mortgage (ARM) rather than a fixed rate home loan. ARMs offer an initial fixed rate term (5 or 7 years are the most common options) before adjusting every six months and according to current mortgage rates.

When you buy points on an ARM, your reduced interest rate only applies to the initial term period. Because there’s less cost-saving potential for the borrower, lenders may charge less for mortgage points in this scenario.

If you choose to use an ARM, or if you want to refinance from an ARM to a fixed rate mortgage, you’ll need to fill out some additional information for the points calculator. Add the following information under the section, “If loans have adjustable rates.” Note that if you are sticking with a fixed rate mortgage, you can skip this portion:

• Months before first adjustment: How much time is left on your fixed rate term
• Months between rate adjustments: How often your ARM mortgage rate resets
• Maximum rate adjustment: The most your ARM rate can change when readjusted
• Minimum rate: The lowest possible rate your lender can charge on your ARM
• Maximum rate: The highest possible rate your lender can charge on your ARM
• Margin: The fixed amount your lender adds to the base rate of an ARM to set the loan rate
• Index rate: The benchmark interest rate lenders use to set interest rates on loans
• Index rate change per adjustment: The anticipated movement of the index rate between adjustment periods
• Months between index adjustments: The frequency of change for the index rate

With that info entered into the mortgage points calculator, head down to the “Regarding loan one” and “Regarding loan two” fields. “Loan one” refers to your mortgage before buying points and “loan two” refers to your mortgage after you’ve bought down the rate. Using a fixed rate mortgage? Then this part will be easy: just select the fixed rate mortgage option for each one.

ARMs are a bit more complicated, but only by a little. In addition to checking the box for an adjustable rate mortgage, you’ll also need to let the points calculator know if you anticipate your interest rate increasing or decreasing after the fixed rate term ends.

4. Review your mortgage points calculator results

Once you’ve filled in all of the required information, click on the “submit” button to see a brief overview of your results. Our discount points calculator showcases the most relevant information first rather than bog you down with a detailed amortization table (although that info is just a click away). On the “results” page, you’ll find:

• How much you might save with mortgage points
• How long it will take to break even
• How much you’ll spend on principal and interest each month
• How much you’ll spend on property taxes and homeowners insurance
• How much you’ll spend on mortgage insurance each month
• How much you’ll spend on your monthly mortgage payments

For most borrowers, that information will be enough to make an informed decision about buying points on a mortgage. But some people will want to review a detailed amortization schedule first, and that’s where the “Tables” tab can help.

Click over to that section to see a thorough breakdown of your potential mortgage payments, starting from the first month of your home loan to the last. The top chart shows your amortization schedule if you made no changes, while the lower one represents your schedule after buying mortgage points.

This detailed view highlights the impact that buying down the rate can have on your interest, principal and total mortgage payment each month. You can also see how much your cumulative interest will grow each month, letting you compare overall savings against the expense of the mortgage points themselves.

How much do mortgage points cost?

The cost to buy down the rate will largely depend on the size of your home loan as well as the value that your lender attaches to each mortgage point. That being said, industry standards typically follow this formula:

• 1 point costs 1% of your total loan amount
• Buying 1 discount point will lower your interest rate by 0.25 percentage points

So, how does that look in action? Let’s go over a real-world example to find out.

Mortgage points example

We’ll say you’re applying for a $400,000 loan — a 30-year fixed rate mortgage, for the sake of simplicity — at a 3% interest rate and want to buy a single mortgage point:

• 1 point = $4,000
• 1 point will lower your interest rate from 3% to 2.75%

In that scenario, you could potentially save as much as $11,424 in interest by buying points. Keep in mind, that assumes you’ll stay current on your payments for the entire 30 years of your loan term.*

Are mortgage points tax-deductible?

The IRS categorizes mortgage points as prepaid interest on your home loan, putting these expenses in the same classification as home mortgage interest. As such, they may be tax-deductible in certain scenarios. If you’re able to deduct mortgage points from your tax footprint, you will have two options: apply that deduction ratably over the entire life of the loan or apply it in full the year you pay for your mortgage points.

To deduct discount points, you will need to itemize your tax returns. Keep in mind that the IRS has several guidelines to follow regarding tax-deductible mortgage points so it’s always best to consult a professional tax advisor who can show you how to proceed.

When will you break even on mortgage points?

The big question every borrower needs to ask is when will the upfront cost of mortgage points actually pay off? In other words, when will the money you save on interest outweigh your initial investment? Our tool includes a mortgage points break even calculator to help you find the answer. As noted above, you can find your break-even point in the brief overview provided under the “results” tab.

But you’ll need to place your break-even point within the context of your financial circumstances and housing plans to really understand if mortgage points are a good idea. You might think that an earlier break-even point would mean to go ahead and buy down the rate, but what if you don’t expect to own your home for such a long time? Paying for points may not be the wisest investment with such little payoff.

Alternatively, if you plan to stay in your home for the long haul, break-even points that are far in the future may not be the deal-breakers they initially appear to be. All things being equal, you’ll always want to break even sooner rather than later. But, you can still stand to save money on mortgage interest even if you have to wait longer to see your points investment pay off.

Mortgage points and APR: What you should know

Comparing different types of mortgages and loan terms can be tricky because there are so many variables that may impact the overall cost of the loan. Looking at the annual percentage rate (APR) can be very helpful in this regard since it reflects the total cost of borrowing from your lender.

APRs factor in every expense you’re responsible for to give you a complete view of the financial ramifications of your mortgage:

• Interest rate
• Mortgage points
• Origination fees
• Lender fees

When consulting a mortgage professional, be sure to ask about the APR of each option that’s presented to you. This way, you can base your decision on the total cost of your home loan.

Discount points on real estate: Pros and cons

To make the most financially prudent decision about mortgage points, you first need to weigh the advantages and drawbacks:

Pros of paying mortgage points

• Lower your interest rate
• Enjoy more favorable loan terms than you might otherwise qualify for
• Reduce your monthly payment
• Pay less interest over the life of your home loan
• Free up your monthly budget for other expenses
• Potentially deduct discount points from your income taxes

Cons of paying mortgage points

• Requires an upfront payment
• Cost of points scales with the amount of your home loan
• Reduced interest rate only applies to fixed rate term on ARMs
• May not pay dividends if you decide to sell or refinance your home in the near future
• Money spent on mortgage points could be used instead on your down payment

When should you buy mortgage points?

Not sure if you should buy down the rate? Here are a few scenarios where it may make sense to buy loan discount points:

• You plan to stay in your home for a long time
• You want a lower interest rate than you’ve been offered
• You have space in your housing budget to buy points

You plan to stay in your home for a long time

We noted earlier that the IRS views mortgage points as prepaid interest, and that can be a helpful way for you to think about them too. You may save more money on your mortgage by buying discount points, but it will take time for those savings to materialize.

If you don’t plan to stay in your home for a long time — think several years, if not longer — then you may wind up paying upfront for interest that otherwise could have been spread out over the life of the loan. Always use a mortgage points calculator to find your break-even point so you can see how long you need to stay in your home before buying down the rate really starts to pay off.

You want a lower interest rate than you’ve been offered

Another factor to consider is your loan eligibility. Mortgage points allow people who otherwise might not qualify for a lower rate — due to price adjustments related to credit — reduce their interest rate by adding loan discount points. If you’re concerned that your credit score, debt-to-income (DTI) ratio and other loan criteria may stand in the way of getting a lower mortgage rate, then buying down the rate could be a good option to consider.

You have space in your housing budget to buy points

Above all else, think about your budget. Can you afford you to spend extra money on discount points? Buying discount points won’t make much sense if it means you won’t have enough funds left over for other housing costs, your basic expenses and an emergency fund.

Also, how will that fee impact your down payment? Paying less on your down payment in favor of mortgage points could mean you’ll owe private mortgage insurance (PMI) on your home loan. That extra expense may undercut the financial benefits of buying down the rate — if not cancel them out entirely.

Start saving on interest with mortgage points

Purchasing mortgage points — AKA, buying down the rate — will lower the mortgage rate, which means you’ll pay less interest each month and over the life of your loan. You have the option to buy discount points any time you originate a new loan, so you can take advantage of lender credits if you’re buying a new home or refinancing an existing mortgage.

Paying extra on points can be extremely beneficial, and our mortgage points calculator will show you how much you stand to save by buying down the rate. Once you are done, talk to a local mortgage professional to get your exact rate. When applying for a mortgage or refinance, be sure to let your loan officer know that you want to know more about buying discount points to lower your interest rate.

Disclaimer

*Sample scenario provided for illustration purposes only and is not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard.

Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Rate for current rates and for more information. All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Rate, Inc. does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Rate, Inc. Rate, Inc. its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action. Rate does not provide tax advice. Please contact your tax adviser for any tax related questions.