Discount Points Calculator

What This Calculator Does

The Discount Points Calculator helps you quickly determine whether paying mortgage points upfront to lower your interest rate is a smart financial move. By comparing the cost of points against the resulting interest savings over the life of your loan, this tool gives you a clear, data-driven answer about the value of buying points. Whether you are a first-time homebuyer or refinancing your existing mortgage, this calculator empowers you to make informed, confident decisions about one of the most significant aspects of home financing.

With just a few key details about your loan, you can see how much you might save each month, annually, and over the full loan term when purchasing points. The calculator also shows your net savings after accounting for the upfront cost and estimates the annual return on your investment in points, making it easier than ever to assess if points are truly worth it for your situation.

How to Use This Calculator

1. Enter your Loan Amount: Input the total amount you plan to borrow for your mortgage or refinance.
2. Specify your Current Interest Rate: Provide the interest rate you would pay if you do not purchase any points.
3. Input the Rate with Points: Enter the lower interest rate you could receive by purchasing the specified points.
4. Select your Loan Term: Indicate the total length of your mortgage (for example, 15 or 30 years).
5. Enter the Points Cost: Specify the total dollar amount you would pay upfront to buy the points (usually a percentage of your loan amount).
6. Review Your Results: The calculator will instantly display your Points Cost, Monthly Savings, Annual Savings, Total Interest Savings, Net Savings after accounting for points, and the Point Value as an annual return percentage.
7. Interpret Your Savings: Use the results to assess whether paying points will save you money over the life of your loan, and if the investment offers a strong return.
8. Adjust Inputs as Needed: Experiment with different rates, loan terms, or points costs to compare scenarios and find the best fit for your financial goals.

Definitions of Key Terms

Loan Amount

The total principal you are borrowing from the lender, before interest and other fees are added.

Current Interest Rate

The annual interest rate offered by your lender if you do not pay any points upfront.

Rate with Points

The lower annual interest rate you can secure by purchasing mortgage points.

Loan Term

The total duration of your mortgage agreement, usually measured in years (such as 15 or 30 years).

Points Cost

The upfront dollar amount you pay to purchase mortgage points, typically calculated as a percentage of your loan amount (one point equals 1% of the loan).

Monthly Savings

The reduction in your monthly mortgage payment due to a lower interest rate from buying points.

Annual Savings

The total amount of interest you save each year as a result of your lower monthly payment.

Total Interest Savings

The cumulative interest you save over the entire loan term by purchasing points and securing a lower rate.

Net Savings (After Points)

The total savings after subtracting the upfront cost of the points from your total interest savings. This tells you the true financial benefit of buying points.

Point Value (Annual Return)

An estimated annual return on your investment in points, shown as a percentage. This helps compare the benefit of buying points to other investment opportunities.

Calculation Methodology

Calculate original monthly payment:
Monthly Rate (original) = Current Interest Rate / 12 / 100
Number of Payments = Loan Term * 12
Monthly Payment (original) = Loan Amount * [Monthly Rate (original) * (1 + Monthly Rate (original)) ^ Number of Payments] / [(1 + Monthly Rate (original)) ^ Number of Payments - 1]

Calculate new monthly payment with points:
Monthly Rate (with points) = Rate with Points / 12 / 100
Monthly Payment (with points) = Loan Amount * [Monthly Rate (with points) * (1 + Monthly Rate (with points)) ^ Number of Payments] / [(1 + Monthly Rate (with points)) ^ Number of Payments - 1]

Monthly Savings = Monthly Payment (original) - Monthly Payment (with points)
Annual Savings = Monthly Savings * 12
Total Interest Savings = (Monthly Payment (original) * Number of Payments) - (Monthly Payment (with points) * Number of Payments)
Net Savings (After Points) = Total Interest Savings - Points Cost
Point Value (Annual Return) = (Annual Savings / Points Cost) * 100

The calculator uses the standard amortization formula to compare the total interest paid over the life of the loan with and without discount points. By subtracting the upfront cost of the points from the total interest saved, it shows your net benefit. Point Value expresses your savings as an annualized return, making it easier to compare to potential returns from other investments.

Practical Scenarios

• Long-term homeowners: If you plan to stay in your home for the full loan term, buying points may yield significant savings. Use the calculator to see if your net savings are substantial over 30 years.
• Refinancing for lower payments: Homeowners refinancing their mortgage can use this calculator to assess if paying points for a lower rate will recover the upfront cost before they plan to sell or refinance again.
• Comparing lender offers: When choosing between lenders, use the calculator to compare offers with different rates and points, ensuring you select the most cost-effective option.
• Evaluating short-term stays: If you expect to move or refinance within a few years, the calculator helps determine whether the monthly savings offset the upfront points cost during your expected time in the home.

Advanced Tips & Best Practices

• Estimate your break-even point: Divide your Points Cost by the Monthly Savings to see how many months it takes to recoup your upfront investment. If you plan to stay in your home longer than this period, buying points may be worthwhile.
• Factor in tax considerations: Points paid on a home purchase may be tax-deductible in the year you pay them. Consult a tax advisor to determine if you can claim this benefit, which can improve your net savings.
• Compare to other investments: Use the Point Value (Annual Return) to decide if buying points offers a better return than alternative uses for your money, such as paying down higher-interest debt or investing elsewhere.
• Be cautious with short time horizons: If you might move or refinance soon, buying points may not provide enough time to realize meaningful savings. The calculator helps clarify this break-even risk.
• Negotiate with lenders: Some lenders may offer different rates or point structures. Use the calculator to negotiate the best combination of rate and points for your situation.

Frequently Asked Questions (Optional)

Are mortgage points always worth it?

Not always. The value of mortgage points depends on your expected time in the home, the upfront cost, and how much the reduced interest rate saves you. Use this calculator to see if the net savings make sense for your unique situation.

Can I pay points when refinancing as well as buying?

Yes, lenders allow you to pay points to lower your rate whether you are purchasing a new home or refinancing an existing mortgage. The calculator works for both situations.

What if I plan to sell or refinance before the loan term ends?

If you expect to move or refinance soon, your total savings may not justify the upfront cost of points. The calculator shows your break-even period and net savings to help you decide if buying points is still beneficial.