What are mortgage points and what do they cost?
A discount point is a fee paid to the lender at closing in exchange for a lower interest rate for the life of the loan. One point conventionally costs 1 percent of the loan amount — 3,000 on a 300,000 mortgage — and typically buys a rate reduction of around 0.25 percent, though the exact buy-down varies by lender and loan type. Points are sometimes called buying down the rate.
How do I know if buying points is worth it?
It comes down to the break-even point: the number of months of lower payments needed to recover the upfront fee. If you keep the loan longer than that, you profit; if you sell or refinance sooner, you lose. Typical break-even periods run from four to seven years. This calculator computes the break-even month and compares it against how long you actually expect to keep the loan, which is the number that decides it.
What does the break-even calculation leave out?
Two things worth knowing. First, the time value of money: cash spent on points could have been invested or kept as a buffer, so the true break-even is slightly later than the simple version. Second, tax treatment — in some countries points on a primary residence are deductible, which shortens the break-even. Lenders quote the simple version, so this calculator shows it too, but states the assumptions rather than hiding them.
Are points ever a bad idea even if the maths works?
Yes. Points consume cash at closing, exactly when it is scarcest, and that money might do more good as a larger down payment — which can lower your rate anyway by improving the loan-to-value ratio and may remove mortgage insurance entirely. If paying for points would leave you without a reserve, or would push your down payment below 20 percent, the arithmetic on the rate is not the whole picture.
What is the difference between discount points and origination points?
Discount points buy down your interest rate and are optional. Origination points are a lender fee for processing the loan and buy you nothing — they are simply a cost. Both are quoted as a percentage of the loan, which makes them easy to confuse on a loan estimate. This calculator models discount points only.
Can I negotiate points, or ask the seller to pay them?
Both happen. Lenders often have flexibility on their buy-down schedule, so it is worth asking what rate reduction a point actually buys and comparing across lenders. In a slower market, sellers sometimes contribute toward closing costs including points — a seller-paid buy-down can be worth more to a buyer than an equivalent price reduction, because it lowers the payment for the whole term.