Calculators
Impact of Discount Points Calculator
Wondering how to get a lower interest rate? You can buy discount points with extra cash at closing to reduce the interest rate and monthly payments.
Check out our free mortgage discount point calculator to learn how much a discount point costs and how long it will take you to break even.
Buying discount points (or mortgage points) means paying extra cash at the time of closing to reduce the interest rate and monthly payments. Another option would be to use that money towards a larger down payments, reducing the loan amount. Which option makes the most sense? Use this calculator to find out how long it will take to recuperate the cost for buying points called the breakeven.
If you plan to move or refinance sooner than the breakeven date, consider putting the money towards a larger down payment.
These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only. Calculator results are rounded down to the nearest dollar. Payment shown does not include taxes, insurance, or mortgage insurance (if applicable). This does not constitute an offer or approval of credit. Contact a PrimeLending home loan officer for actual estimates.
For example, a Conventional fixed rate loan with the terms purchase price of $312,500, on a loan term of 360 months, down payment of 20%, and an interest rate of 6.5%, will result in an annual percentage rate of 6.598% with $3,613 in APR fees. Rate pulled 09/02/22, rates change daily. Loans are subject to borrower qualifications, including income, property evaluation, and final credit approval.
WHAT ARE MORTGAGE POINTS?
Did you know you can use mortgage points to buy down your interest rate? Mortgage points — a.k.a. discount points — are upfront fees a borrower pays a lender to get a reduced interest rate. Each discount point lowers the interest rate by 0.25%.
By using discount points to lower your interest rate, you effectively lower your overall monthly payment as well. This could lead to increased savings over time, depending on how long you plan to live in your home. The amount you can save depends on how many discount points you purchase, so the more points you buy, the lower your rate may be. Pro tip: Talk to a tax professional about whether you may deduct any discount points you paid to get your mortgage when tax time rolls around.
HOW MUCH DOES IT COST TO BUY DOWN MY INTEREST RATE?
The cost to buy down your interest rate depends on the amount of mortgage points you buy. And the cost of mortgage points depends on your loan. One point equals one percent of the principal mortgage amount, so on a $250,000 loan one point would cost $2,500. Using that example, to buy down your interest rate by 1% the mortgage points would cost $10,000.
One mortgage discount point usually lowers your monthly interest payment by 0.25%. So, if your mortgage rate is 5%, one discount point would lower your rate to 4.75%, two points would lower the rate to 4.5%, and so on. By using a discount point calculator, like the one above, you can get an estimate of how much you could save over the life of your loan if you buy discount points.
Keep in mind that discount points are only effective if you stay in your home long enough to recoup the money you spent on them; this is called the “breakeven” point. If you plan to sell your home or refinance in a few years, discount points might not make the most sense. However, if you plan on living in your home long-term, buying a mortgage discount point or two could help you save money over time.
Also, you should only buy the mortgage points if it works for your budget in the current market conditions. If you are feeling spread thin as it is to afford your mortgage with today’s interest rates, discount points may not be the way to go. But, if you believe you can comfortably afford your monthly payment and have some money left over to build your emergency fund, discount points might be a worth investment to get a lower mortgage rate.
WHEN SHOULD YOU BUY DISCOUNT POINTS?
Since buying discount points is an upfront cost of reducing your interest rate, the timing needs to be right for you to gets all the benefits of doing so. There are certain times when it makes sense to buy down your interest rate with mortgage points. Some instances that might make the most sense include:
Planning to live in the home long term. Buying mortgage points can save you money over the life of the loan, but you need to live in your home long enough to recoup the money you spent to reduce your interest rate. The longer you live in the home, the more savings you could see. If you don’t plan to stay in the home long term, discount points might not be the best option for you.
No plans to refinance soon. If you are thinking of refinancing to a lower interest rate down the road but also want to buy discount points, think again. A refinance changes your interest rate so you may not need your mortgage points.
