Mortgage Points

Finding the Break-Even Point on Prepaid Interest

A discount point is a fee paid to your lender at closing — always exactly 1% of your loan amount — in exchange for a lower interest rate for the life of the loan. Enter your loan amount, the rate you’d get without points, the (lower) rate you’d get by paying for points, and how many points you’re buying, and this calculator works out the upfront cost, the resulting monthly savings, and how many months it takes for those savings to recoup what you paid.

Buying points is essentially prepaying interest. It only pays off if you keep the loan long enough past the break-even point below — selling, refinancing, or paying off the loan early can leave you having paid for a discount you never fully used.

The Formula

Both monthly payments use the standard fixed-rate amortization formula:

$$M = \vA{P} \times \frac{\vB{r}(1+\vB{r})^{\vC{n}}}{(1+\vB{r})^{\vC{n}} - 1}$$

where $\vB{r}$ is the monthly interest rate (annual rate ÷ 12) and $\vC{n}$ is the number of monthly payments — computed once at the rate without points and once at the discounted rate.

$$\vD{\text{Points Cost}} = \vA{\text{Loan Amount}} \times \frac{\text{Points Purchased}}{100}$$ $$\text{Break-Even Months} = \frac{\vD{\text{Points Cost}}}{\text{Monthly Savings}}$$

Only when the discounted rate actually produces a lower monthly payment.

Worked Example

A $300,000 loan, 7% without points versus 6.5% by buying 2 points, over a 30-year term:

1. Monthly payment without points: about $1,995.91.
2. Monthly payment with points: about $1,896.20.
3. Points cost: 2% of $300,000 = $6,000.
4. Monthly savings: about $99.70.
5. Break-even: $6,000 ÷ $99.70 ≈ 60 months (5 years).
6. Over the full 30-year term, buying the points saves roughly $29,893 once the $6,000 upfront cost is included — but only because the loan runs well past the 5-year break-even point. A loan paid off or refinanced before then would have cost more with the points than without.

Key Factors to Consider

• Discount points are tax-deductible in many cases, which changes the effective break-even calculation. Points paid on a primary residence’s purchase mortgage are often deductible as mortgage interest in the year paid, subject to IRS rules — this can meaningfully shorten the real-world break-even period compared to the pre-tax figures this calculator shows, though the specific tax treatment depends on individual circumstances.
• Lender credits work in the opposite direction from points — a higher rate in exchange for cash back at closing. Some borrowers who are short on closing cash but plan to keep a lower rate for a shorter time intentionally take a lender credit instead of points, which is the mirror image of the discount-point decision this calculator analyzes.
• The rate reduction per point varies by lender, loan program, and market conditions. There’s no universal “0.25% per point” rule — always use the actual rate a specific lender quotes for a specific number of points, since the real relationship between points purchased and rate reduction differs from one loan offer to the next.
• How likely you are to move, sell, or refinance before the break-even point is the single biggest factor in this decision. A discount point purchase is a bet on keeping the loan long enough to recoup its upfront cost — the shorter and less certain your expected time in the home, the less attractive buying points typically becomes, even if the calculated break-even period looks reasonable on paper.

Common Mistakes

• Assuming every point lowers the rate by the same fixed amount. The rate reduction per point varies by lender and market conditions — always use the actual rate your lender quotes for a given number of points, not a rule-of-thumb estimate.
• Ignoring how long you’ll actually keep the loan. The break-even period is the whole decision here — points purchased right before a planned move or refinance are money spent for a discount you’ll never fully recoup.
• Comparing only the upfront cost, not the full-term picture. A lower monthly payment feels like an obvious win, but the real question is whether the total savings over the loan’s full life outweigh what you paid upfront — which is exactly what the lifetime comparison above shows.

Useful to Know

• Want the full monthly payment breakdown for either rate, including taxes and insurance? Mortgage Calculator shows the complete PITI picture.
• Considering points on a refinance rather than a new purchase loan? Refinance Calculator weighs a full refinance’s closing costs against the new payment.
• Deciding between points and a bigger down payment instead? Down Payment Calculator shows how a larger down payment changes your loan amount and PMI.