Mortgage Calculator: ‘Should I Buy Points?’

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How we got here

How this calculator works

To use the “Should I buy points?” mortgage calculator, type your information into these fields:

  • Desired loan amount

  • Loan term (years)

  • Interest rate without points (shown as a percent)

  • Number of points (this is required to deliver your results)

  • Interest rate with points This shows what your rate would be if you paid for points. In general, lenders drop the interest rate by a quarter of a percentage point for each point purchased, up to a limit. But maybe a lender has offered you a rate that’s different for buying this number of points. If so, type in that rate to ensure the accuracy of your results.

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Understanding your results:

Breakeven period (years). This shows how many years it will take before you’ve paid off the points you purchased and when you’ll start saving money from the lower interest rate.

Breakeven period (months). This is the same as in the previous result, shown in a different way: The number of months before your break-even point.

Payment required to buy points. Your cost to buy the number of points entered above.

Monthly mortgage payment with points. Your new, lower monthly mortgage payment after purchasing points.

Monthly mortgage payment without points. This is your monthly payment if you don’t buy points. Use this result to compare the payments with and without points to see how buying points lowers your monthly payment.

Note: Lenders are required to provide a closing disclosure form that shows all the fees you’ll pay three business days before the scheduled closing of your loan. See what it looks like.

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Does buying points pay off?

The “Should I buy mortgage points” calculator determines if buying points pays off by calculating your break-even point. That’s the point when you’ve paid off the cost of buying the points. From then on, you’ll enjoy the savings from your lower interest rate.

To find the break-even point, the calculator determines your monthly savings from buying points and divides that amount into the total cost of the points. For example:

On a $200,000 loan, purchasing one point brings the mortgage rate from 4.1% to 3.85%, dropping the monthly payment from $957 to $938 — a monthly saving of $19. The cost: $2,000. The calculator divides the cost by the monthly savings amount to find the break-even point.

$2,000/$19 = 105 months (8.8 years)

Back to the question: Is buying points worth it? The answer depends on how long you’ll keep the mortgage.

Is buying mortgage discount points a smart idea?

As with much in life, the answer depends on the details. This rule of thumb may help: The longer you keep the mortgage, the more money you save by buying points.

Buying points could be helpful if:

  • You’re purchasing your forever home

  • You have enough cash upfront to make a large down payment and still have some left for lowering the rate. You expect to keep the loan long enough that you’ll exceed the break-even point in this calculator

But buying points can be a bad thing if:

  • You’ll sell the home or refinance before you’ve hit your break-even point

  • You need the cash you’ll use to buy points

  • You reach the break-even point, but the monthly savings are so small that it doesn’t make a meaningful dent in your budget

Buying mortgage discount points 101

What are mortgage points?

There are two kinds of mortgage points:

  • Discount points. When you hear “points,” that usually means “discount points” — the fees you pay a lender to lower your home loan’s interest rate. You can buy points either when buying a home or refinancing your home loan. It’s sometimes called “buying down” your rate. Lowering your interest rate reduces the size of your monthly payments.

  • Rebate points. Another kind of points are “negative points” or “rebate points.” In this scenario, the closing costs on your mortgage are added to the cost of your loan in the form of a higher interest rate. You may have heard of a no-closing costs mortgage. This is it — you don’t need cash for closing. But the higher rate means a higher monthly payment. The trade-off can be useful if you don’t have cash for closing costs.

What do points cost?

One mortgage point typically costs 1% of your loan total (for example, $2,000 on a $200,000 mortgage). So, if you buy two points — at $4,000 — you’ll need to write a check for $4,000 when your mortgage closes. That check is in addition to paying closing costs (which run from 3% to 6% of the mortgage total, or about $6,000 to $12,000 on a $200,000 home).

Are mortgage points tax-deductible?

While mortgage interest in still tax deductible, the Tax Cuts and Jobs Act of 2017 puts a cap on the amount of mortgage interest that may be deducted. Because discount points are prepaid interest, they may be deducted as part of your home mortgage interest. See the details here.

Here’s a tip: When you’re loan shopping, ask each lender for two estimates: one for your mortgage closing costs if you buy points, another for the loan without points. Show the estimates to a tax preparer or tax accountant to find out how paying points could affect your taxes.

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