If you’re searching for a home loan, you may have heard the term “mortgage points” come up a few times in conversation. These points, which you purchase at the time of closing, help homeowners get a better interest rate over the course of the loan.

You may be wondering if buying down the rate is even worth it, how much you can expect to save, and how many points you should consider purchasing. These questions are why we built this Mortgage Points Calculator. We have also included a list of expanded definitions and explanations at the bottom of the tool.

Important Terms to Know for the Mortgage Points Calculator

Not sure what a term means? We’ve compiled a helpful list of definitions that apply to the mortgage points calculator.

Mortgage points

You might be wondering what, exactly, a mortgage point is and how it works. Mortgage points, which may also be referred to as discount points, are a type of fee paid to the lender at the time of closing. Purchasing points is often called “buying down the rate” since each point purchased lowers your mortgage’s interest rate by a quarter of a percent. One point will typically cost 1% of your mortgage amount.

For example, if you have a \$100,000 mortgage with a 4.5% interest rate, one point will cost \$1,000. That point, however, will lower your rate to 4.25%. While you pay \$1,000 up front, you can potentially save thousands in interest, depending on how long your loan term is.

Ultimately, discount points reduce your monthly payments. But your total savings depends on how much you borrow and your loan’s term. Use the calculator to try different values and see how the results change with the mortgage points amounts and the loan amount and loan term.

Loan amount

Your loan amount is simply the amount of money that you borrow from the bank. Be careful not to confuse the loan amount with the purchase price - your mortgage will include an assortment of fees beyond the listing price of your new home. Your loan amount is likely the purchase price of your home, minus any money you put down. It is rare to receive 100% financing for a home.

Loan term

The loan term is the number of years it will take to repay your mortgage. The most common loan term is 30 years, but nowadays, it’s also common to see 15-year and 20-year loans. A mortgage with longer terms offers homeowners a financial tradeoff: they will make smaller monthly payments over a greater period of time. On the other hand, a mortgage with a shorter term will have larger payments, but the borrower will repay what they owe much sooner.

The loan term also affects how much interest is paid over the course of the loan. All else equal, borrowers will pay less interest with a shorter loan term. Because of this, your loan term can play a factor in how much money you save with mortgage points.

Savings rate

Your savings rate is the amount of money you might save by adjusting your rate terms. For now, you can enter this as a projection, as you likely will not know the actual number until speaking with a loan officer.

Tax rate

Adjust the tax rate slider to capture the state or municipality tax rates in your market. If you are unsure if this rate applies to you, add this to the list of questions to ask your future loan officer.

Loan rate

Loan rate, which you might commonly hear referred to as the interest rate, is what a lender charges in exchange for letting you borrow the money. It is calculated as a percentage of the loan balance.

On a traditional fixed-rate mortgage, this percentage is fixed and will not fluctuate over the life of the loan. Adjustable-rate mortgages (ARMs), on the other hand, have interest rates that are subject to change. This calculator assumes a fixed-rate mortgage that does not change over time. Several factors determine your loan’s interest rate, including your credit score and history, the location of the house, the loan amount, the loan type, and the size of your down payment.

Break-even point

Though mortgage points can bring you savings, it also includes costs that must be accounted for in your budgeting. The break-even point is when your savings equals the additional cost that comes with purchasing them. Once you hit the break-even, you will start feeling the real savings of the points.

For instance, say your mortgage points cost \$4,000. But thanks to the lower interest rate, you are saving \$200 a month on your mortgage payment. It will take you 20 months to recoup the \$4,000 you spent upfront for the mortgage points— your break-even point.

Mortgage points are only worth it if you have enough time to break even. If you pay off your loan without breaking even, you were likely better off not buying down the rate or purchasing that many points.

Monthly payment

Mortgages are paid back monthly through a monthly payment. Monthly payments have four main components: principal, interest, taxes, and insurance. To help streamline the projection process, however, we have only included the principle and interest in the monthly payment calculations.

Total interest

The total interest is the entire amount of interest you pay over the life of the loan.

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