Mortgage Points Calculator

Buying discount points is a prepayment of interest: the borrower pays cash at closing so the lender accepts a lower coupon for the life of the loan. One point equals 1 percent of the loan amount, and the market price is usually quoted as a rate reduction per point, most often between 0.125 and 0.375 percentage points, with 0.25 the common assumption. The decision reduces to a break-even horizon, upfront cost divided by monthly payment saving. On a 350,000 dollar loan at 6.75 percent for 30 years, two points cost 7,000 dollars and cut the rate to 6.25 percent, moving the payment from about 2,270 to about 2,155 dollars and recovering the outlay in roughly 61 months. The simple break-even understates the true hurdle in two ways and overstates it in one. It ignores the time value of the cash, which if invested would have earned something, and it ignores the equity built faster under the lower rate, since a smaller share of each payment goes to interest. Working against those, the tax treatment helps: points on a purchase of a principal residence are generally deductible in the year paid under Internal Revenue Code section 461(g)(2), while points on a refinance must be amortized across the loan term. The dominant risk is duration. Median United States homeowner tenure runs near 10 to 13 years, but refinancing behaviour is what actually terminates loans, and a rate decline of 100 basis points historically triggers heavy prepayment. Points bought shortly before a refinancing wave are a sunk loss, so the break-even should be compared to expected loan life, not to expected time in the house.

Points originated as a workaround for interest rate ceilings. Federal Housing Administration and Veterans Administration loans carried statutory maximum contract rates, and when market yields rose above those ceilings lenders would not originate at par. The gap was closed with discount points paid at closing, historically by the seller because VA rules long barred veterans from paying them. That practice was routine from the late 1940s onward and became conspicuous during the high-rate periods of the 1970s and early 1980s, when discounts of several points on government loans were common. Congress removed the FHA and VA rate ceilings in the early 1980s, letting rates float, after which points became a voluntary pricing choice rather than a necessity. The modern framework is a disclosure regime. The Real Estate Settlement Procedures Act of 1974 required itemised settlement costs on the HUD-1 form, and the Truth in Lending Act's annual percentage rate folded points into a single comparable number. Because points and origination fees both cost 1 percent yet do entirely different things, comparison remained difficult until the Consumer Financial Protection Bureau's TILA-RESPA Integrated Disclosure rule took effect in October 2015, replacing the old good-faith estimate and HUD-1 with the Loan Estimate and Closing Disclosure. Those forms state discount points as an explicit dollar figure with the rate they buy, which is the data this break-even calculation needs.