What this calculator does
It tells you how many months of lower payments it takes to earn back the cost of discount points, and what the points leave you with if you sell or refinance after a given number of years.
Discount points are an upfront charge, paid at closing, that buys a lower interest rate for the life of a fixed-rate loan. One point costs 1% of the loan amount, and points can come in fractions. How much the rate drops in return is set by the lender's pricing, so it varies from lender to lender and from day to day.
You enter the loan amount, the rate with no points, the rate with points, the number of points and how long you expect to keep the loan. The calculator compares the two monthly payments, works out the break-even two ways, and charts your net position year by year.
Take both rates from the same quote, on the same day
Lenders reprice often, and pricing differs between lenders. If the no-points rate comes from one quote and the points rate from another, or from a different day, the gap between them mixes market movement with the effect of the points, and the break-even means little. Both prices for the same loan, from the same lender at the same time, isolate what the points actually buy.
Points and lender credits
Lender credits are the same trade in the other direction. Instead of paying more up front for a lower rate, you accept a higher rate and the lender covers part of your closing costs. One spends cash now to lower the payment; the other raises the payment to save cash now. The break-even question is the same from either side.
How the math works
Both payments use the standard amortization formula on the same loan amount and term, once at each rate. The simple break-even divides the cost of the points by the monthly saving and rounds up to a whole month.
- C
- cost of the points: loan amount × points ÷ 100
- M₀
- monthly payment at the rate without points
- M₁
- monthly payment at the rate with points
That figure leaves something out. At the lower rate, less of each payment goes to interest and more to principal, so the points loan's balance falls a little faster. When you sell or refinance, you owe less, and that difference is money back in your pocket. The balance-adjusted break-even is the first month where the net position below turns positive:
- m
- months since closing
- B₀, B₁
- balance after m payments without and with points
The net result shown with the calculator is this figure at your horizon. The search stops at the end of the loan term, so a break-even later than that shows as never.
Worked example
Suppose a quote for a $350,000, 30-year loan offers 6.75% with no points or 6.375% for 1.5 points, and you expect to keep the loan about 7 years.
Worked example
- Cost of the points: $350,000 × 1.5 ÷ 100 = $5,250.
- Payments: $2,270.09 at 6.75% and $2,183.54 at 6.375%, a saving of $86.55 a month.
- Simple break-even: $5,250 ÷ $86.55 = 60.7, rounded up to 61 months (5 years 1 month).
- After 7 years (84 payments), the lower payments add up to $7,270 and the points loan's balance is $1,964 lower. The net position turns positive in month 48, or 4 years.
Over 7 years: $7,270 + $1,964 − $5,250 = $3,984 ahead of the no-points loan.
The horizon question
The break-even only matters if you keep the loan past it. Run the same quote with a 3-year horizon: the lower payments total $3,116 and the balance is $836 lower, so the points finish $1,299 behind. Selling the home, refinancing to a new rate, or paying the loan off early all end the savings, whenever they happen.
There is also the cash itself. The $5,250 spent on points is money not available for the down payment, closing costs, savings or anything else. The calculator compares the two loans only; it puts no value on what that cash might otherwise do.
Common mistakes
- Comparing rates from different quotes or days. The gap then includes market movement and lender differences, not just the points. Both rates belong to one quote.
- Counting origination charges as discount points. Only discount points lower the rate. An origination fee expressed in points pays for making the loan and is charged either way, so it stays out of this comparison.
- Ignoring how long you will keep the loan. A break-even of six years means little if you expect to move or refinance in four. The horizon field turns that into dollars.
- Using the APR instead of the note rate. The APR already folds the points into a yearly cost figure. Payments are calculated from the note rate, so enter note rates here.
- Reading the break-even as the whole story. It ignores what the cash could do elsewhere and treats a dollar saved in year eight like a dollar spent at closing.
Limits of this estimate
- It assumes a fixed rate for the whole term. On an adjustable-rate loan, a lower start rate may last only until the first adjustment.
- It assumes the points are paid in cash at closing. Points rolled into the loan amount raise the balance and earn interest themselves.
- Savings are counted dollar for dollar, with no allowance for inflation or for what the cash could have earned.
- Taxes are left out. Whether points affect your taxes depends on your situation and the rules that apply to you.
- It compares principal and interest only. Property tax, insurance and other costs are the same on both loans.
Frequently asked questions
How much does one discount point cost?
One point is 1% of the loan amount, so one point on a $300,000 loan costs $3,000. Points can be bought in fractions, such as half a point. Your Loan Estimate usually shows them both in dollars and as a percentage of the loan amount.
How much does one point lower the rate?
There is no fixed answer. What a point buys depends on the lender, the loan program and that day's pricing, and the second point does not always buy as much as the first. That is why this calculator asks for both rates instead of assuming a conversion.
Which break-even figure is the right one?
Both are correct answers to slightly different questions. The simple figure counts only the lower payment. The balance-adjusted figure also counts the extra principal the lower rate pays off, which you keep when you sell or refinance. The simple one is the more conservative of the two.
What happens if I sell or refinance before the break-even?
The points are not refunded. Whatever part of the cost the savings have not yet covered is a net loss compared with the no-points loan. Set the horizon to a shorter period to see the size of the shortfall.
What are lender credits?
The same trade run in reverse. You accept a higher rate and the lender pays part of your closing costs. The break-even logic is a mirror image: the credit is cash now, and the higher payment uses it up a little each month.
Can someone else pay for the points?
Sometimes a seller or builder pays points as part of a concession, within whatever limits your loan program sets. The lower payment works the same way, but the cost no longer comes out of your pocket, so your own break-even is immediate.
Next steps: a temporary buydown also lowers the payment, but only for the first year or two; the temporary buydown calculator shows its cost. To weigh two complete offers, fees and all, use the loan comparison calculator. If you are refinancing, the refinance break-even calculator covers the closing costs as a whole.