Mortgage Points Calculator - Cost & Savings Tool

What are Mortgage Points?

Mortgage points, also known as discount points, are upfront fees paid directly to the lender at closing in exchange for a reduced interest rate. This practice is often referred to as buying down the rate. Lowering your interest rate reduces your monthly mortgage payment and the total interest you will pay over the life of the loan.

Each mortgage point you purchase costs exactly 1% of your total mortgage loan amount. For example, on a $300,000 mortgage, one point costs $3,000. Lenders also allow the purchase of fractional points (such as 0.5 points or 1.25 points), which scale proportionally.

The Mortgage Points Formulas

The calculations behind mortgage points are straightforward and depend directly on the mortgage loan amount.

1. Cost of One Point

To find the cost of a single point, divide the total mortgage loan amount by 100:

$$\text{COOP} = \frac{\text{MLA}}{100}$$

Where $\text{COOP}$ is the cost of one point ($) and $\text{MLA}$ is the mortgage loan amount ($).

2. Total Cost of Points Paid

To find the total cost when purchasing multiple or fractional points, multiply the cost of one point by the number of points:

$$\text{COPP} = \text{COOP} \cdot \text{NP} = \left(\frac{\text{MLA}}{100}\right) \cdot \text{NP}$$

Where $\text{COPP}$ is the total cost of points paid ($) and $\text{NP}$ is the number of points purchased.

Evaluating the Break-Even Point

Buying points is essentially paying interest upfront to save money later. To decide if buying points is a sound financial decision, you must calculate the break-even period. The break-even period is the number of months it takes for the monthly payment savings to equal the upfront cost of the points.

$$\text{Break-Even Months} = \frac{\text{Total Cost of Points}}{\text{Monthly Payment Savings}}$$

If you plan to stay in the home and keep the mortgage longer than the break-even period, purchasing points will save you money in the long run. If you plan to move or refinance before reaching the break-even point, you will lose money by buying points.

Step-by-Step Calculation Example

Suppose you are taking out a mortgage loan of $350,000 and the lender offers to reduce your interest rate by $0.25\%$ if you purchase $1.5\text{ discount points}$. Let us calculate the upfront cost of these points.

Step 1: Calculate the cost of one point: $$\text{COOP} = \frac{\$350,000}{100} = \$3,500$$
Step 2: Calculate the total cost for 1.5 points: $$\text{COPP} = \$3,500 \cdot 1.5 = \$5,250$$
Result: Purchasing 1.5 discount points will cost you \$5,250 in upfront closing fees.

Frequently Asked Questions

What is the difference between discount points and origination points?

Although both types of points cost 1% of the loan amount, they serve different purposes. Discount points are optional fees paid to lower your interest rate. Origination points are mandatory fees charged by the lender to cover the administrative costs of processing, underwriting, and evaluating your loan.

How much does one discount point typically lower the interest rate?

As a general rule of thumb, one discount point reduces the mortgage interest rate by $0.25\%$. However, this is not a fixed rule; the exact rate reduction depends on the lender, the type of loan (fixed vs. adjustable), and current secondary market conditions.

Are mortgage points calculated on the home purchase price or the loan amount?

Mortgage points are always calculated as a percentage of the mortgage loan amount, not the home purchase price. For example, if you purchase a home for $400,000 but make a 20% down payment ($80,000), your loan amount is $320,000. Therefore, one point would cost 1% of $320,000, which is $3,200.

Are mortgage discount points tax-deductible?

In the United States, discount points paid on a primary home purchase mortgage are generally fully deductible in the year they are paid. However, points paid on a refinance mortgage must be deducted proportionally over the entire term of the loan. Consult a qualified tax professional for advice specific to your financial situation.

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