This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.
Paying now for a lower rate
When you take out a mortgage in the US, you can often pay discount points at closing to lower the interest rate. One point costs 1% of the loan amount. The reduction varies by lender and market, often around a quarter of a percentage point per point. Points make sense only if you keep the loan long enough for the lower payments to recover what you paid up front.
The calculation
- Monthly payment for each rate: M = P × i ÷ (1 − (1 + i)⁻ⁿ), with i the monthly rate and n the number of months
- Upfront cost = loan amount × points %
- Simple break-even = upfront cost ÷ monthly saving, in months
- Net gain after k months = monthly saving × k + (balance at the higher rate − balance at the lower rate) − upfront cost
The net gain counts the faster principal paydown at the lower rate, which the simple break-even ignores. It does not discount future savings or count the return you could have earned on the cash.
Example
A $400,000 loan over 30 years at 6.75%, or 6.5% with 1 point:
- Cost of the point: $4,000
- Payments: $2,594.39 without points, $2,528.27 with
- Monthly saving: $66.12
- Break-even: 4,000 ÷ 66.12 = about 60 months, or 5 years
- Net gain if you keep the loan 10 years: about $6,034
- Over the full 30 years, the saving minus the cost is about $19,800
When points pay off
- You expect to stay in the home and keep the loan well beyond the break-even.
- You do not expect rates to fall soon. If you refinance in two years, the points are lost.
- You have cash left for the down payment, closing costs and an emergency fund. Putting more down can also lower the payment and may avoid mortgage insurance.
Things to check
Ask lenders to quote the same loan with and without points on the same day, and compare the APR and the Loan Estimate. Points are sometimes offered as a seller or builder concession. Points paid on a home purchase are often tax deductible if you itemize; ask a tax professional about your case.