Mortgage Points Calculator

What Are Mortgage Points?

Mortgage points (also called discount points) are fees you pay upfront to your lender at closing in exchange for a reduced interest rate. One point typically costs 1% of your loan amount and reduces your interest rate by 0.25 percentage points. On a $300,000 loan, one point costs $3,000 and might lower your rate from 7.0% to 6.75%.

When Points Make Sense

Points are beneficial when you plan to stay in the home beyond the break-even period. The break-even point is the time it takes for your monthly savings to equal the upfront cost. If you sell or refinance before breaking even, you lose money. Generally, points are a good deal if you plan to keep the mortgage for at least 5-7 years.

Tax Implications

Mortgage points may be tax-deductible as prepaid interest. For a home purchase, points are generally deductible in the year paid (if certain conditions are met). For a refinance, points must be deducted ratably over the life of the loan. Consult a tax professional for your specific situation.

Negative Points (Rebate Points)

Some lenders offer negative points (lender credits), where you accept a higher rate in exchange for lower closing costs. This can be useful if you are short on cash or plan to move within a few years. The trade-off is higher monthly payments for the life of the loan.

Points vs. Higher Down Payment

Compare the return on buying points versus using that money for a larger down payment. A larger down payment reduces your loan amount and may eliminate PMI. Points only reduce the rate. Run both scenarios to determine which saves more over your expected time in the home.

Understanding Mortgage Points

Mortgage points, also called discount points, are upfront fees paid to a lender at closing in exchange for a reduced interest rate on your mortgage. Each point costs 1% of the loan amount and typically reduces your interest rate by 0.25 percentage points, though the exact reduction varies by lender and market conditions. On a $400,000 mortgage, one point costs $4,000 and might reduce a 7.0% rate to 6.75%. This upfront investment in a lower rate is essentially prepaid interest that saves you money over the life of the loan, but only if you keep the mortgage long enough to recoup the upfront cost through monthly payment savings.

How to Calculate the Break-Even on Points

The decision to buy points comes down to a break-even calculation: how many months of monthly savings are needed to recover the upfront cost. For example, on a $400,000 loan, one point costs $4,000. If buying one point reduces your monthly payment from $2,661 to $2,596 (a savings of $65 per month), the break-even is $4,000 ÷ $65 = 62 months, or just over 5 years. If you plan to keep the mortgage for longer than 5 years, buying points saves money. If you expect to sell or refinance before the break-even, skip the points and take the higher rate. This calculation should also consider the time value of money — $4,000 invested elsewhere could earn returns, so the true break-even is slightly longer than the simple calculation suggests. For a complete analysis, compare the total cost of each option (points paid + all monthly payments) over your expected time in the home.

When Buying Points Makes Sense

Purchasing mortgage points is advantageous in several scenarios. If you plan to stay in the home for a long time (7+ years) and expect to keep the same mortgage, the cumulative savings from a lower rate grow substantially. If interest rates are historically high and you want to reduce your rate while waiting for an opportunity to refinance later, points provide immediate payment relief. If you have excess cash available after covering your down payment, emergency fund, and closing costs, investing in points often provides a better risk-adjusted return than keeping that money in savings. If the seller or builder offers to pay points on your behalf (seller concessions), you get the rate reduction at no personal cost. If itemizing tax deductions, mortgage points are generally deductible in the year paid for a purchase mortgage, providing a partial offset to the upfront cost. In each case, the fundamental test remains the same: will you keep the mortgage past the break-even point?

When to Skip Points

Several situations favor taking the higher rate without paying points. If you expect to move or refinance within 5-7 years, the monthly savings will not offset the upfront cost before you exit the loan. If your cash reserves are limited after the down payment, depleting savings for points leaves you vulnerable to unexpected expenses. If you expect interest rates to decline significantly, paying for a lower rate now becomes wasteful if you refinance within a year or two. If investment returns are high, you might earn more by investing the point money rather than using it to buy down your rate. Some lenders offer negative points (lender credits) where you accept a higher rate in exchange for the lender covering some closing costs — this can be ideal for borrowers who are cash-constrained or expect to refinance quickly. The key principle is that points are a prepayment of interest that only rewards patience.

Negative Points and Lender Credits

The opposite of buying discount points is receiving lender credits by accepting a higher interest rate. For each 0.25% increase in rate, the lender typically credits you 1% of the loan amount toward closing costs. On a $400,000 loan, accepting a rate 0.5% higher might give you $4,000 in credits that cover your closing costs entirely, eliminating the need to bring cash to closing beyond the down payment. This strategy is ideal for borrowers who are cash-constrained, expect to refinance soon, or plan to sell within a few years. The trade-off is a higher monthly payment, but if you are not in the home long enough for the payment difference to exceed the credits received, you come out ahead. Lender credits are particularly popular in purchase transactions where buyers want to minimize cash at closing, and they can be combined with seller concessions to create zero-closing-cost mortgages that preserve cash for moving expenses, furnishing, or emergency reserves.