Use the **Mortgage Points Calculator** to determine the exact break-even period (BEP) for paying discount points on your home loan, or solve for the maximum cost of points you should pay to hit a target BEP.
Mortgage Points Break-Even Calculator
Enter a value in only ONE of the fields below to solve for the missing variable.
Mortgage Points Calculator Formula
$ M = P \frac{i (1+i)^n}{(1+i)^n – 1} $ (Monthly Payment Formula)
$ \text{Monthly Savings} (S) = M_{\text{high}} – M_{\text{low}} $
$ \text{Break-Even Period} (\text{BEP, months}) = \frac{\text{Cost of Points}}{\text{Monthly Savings}} $
Formula Sources: CFPB on Mortgage Options, Investopedia on Mortgage Points
Variables Explained
- Loan Principal Amount: The initial amount borrowed from the lender.
- Loan Term (Years): The length of the mortgage, typically 15 or 30 years.
- Higher Interest Rate: The rate you would pay *without* buying discount points.
- Lower Interest Rate: The discounted rate you get *after* buying points.
- Cost of Points: The total dollar amount paid upfront to secure the lower interest rate. (1 point equals 1% of the loan amount).
- Target Break-Even Period: The number of months you expect to hold the loan before refinancing or moving. Used to calculate the maximum points you should pay.
Related Calculators
What are Mortgage Points and the Break-Even Period?
Mortgage points, also known as discount points, are fees paid to the lender at closing in exchange for a lower interest rate on the loan. Each point generally costs 1% of the loan amount and typically reduces the interest rate by 0.125% to 0.25%. Paying points is essentially prepaying interest to lower your monthly payments over the life of the loan.
The decision to pay points hinges on one critical metric: the **Break-Even Period (BEP)**. The BEP is the amount of time (in months) it takes for the monthly savings from the lower interest rate to equal the upfront cost paid for the points.
If you plan to keep the mortgage longer than the BEP, paying points is financially advantageous. If you plan to sell or refinance before the BEP, you will lose money on the transaction. This calculator helps you make that crucial determination.
How to Calculate the Break-Even Period (Example)
Follow these steps to find the BEP using the calculator’s formula:
- Calculate Monthly Payment (Without Points): Determine the monthly payment for the mortgage using the higher interest rate (e.g., 7.0%). This is $M_{\text{high}}$.
- Calculate Monthly Payment (With Points): Determine the monthly payment for the mortgage using the lower interest rate (e.g., 6.5%). This is $M_{\text{low}}$.
- Find the Monthly Savings: Subtract the lower payment from the higher payment: $S = M_{\text{high}} – M_{\text{low}}$.
- Get the Total Cost of Points: Note the total dollar amount paid upfront for the discount points (e.g., $6,000).
- Calculate the BEP: Divide the total Cost of Points by the Monthly Savings. The result is the Break-Even Period in months. For example, if savings are $100/month, BEP = $6,000 / $100 = 60 months (5 years).
Frequently Asked Questions (FAQ)
Is paying mortgage points always worth it?
No. Paying points is only worth it if you keep the loan long enough to pass the calculated Break-Even Period (BEP). If you plan to move or refinance before the BEP, you will lose money.
Are discount points the same as origination points?
No. Discount points are paid to lower the interest rate. Origination points (or fees) are paid to the lender to cover loan processing costs and cannot be used to reduce the rate.
Are mortgage points tax deductible?
In many cases, yes. Discount points paid to get a lower interest rate can often be fully deducted as prepaid interest in the year you pay them, provided they are for your primary residence and meet other IRS criteria. Consult a tax professional.
What is a typical Break-Even Period for mortgage points?
Break-Even Periods typically range from 2 to 7 years (24 to 84 months). The exact duration depends heavily on the loan amount, the difference in interest rates, and the total cost of the points.