Mortgage Points Calculator
A Mortgage Points Calculator helps you estimate how mortgage points (also known as discount points) can affect the cost of your loan, specifically the interest rate and your monthly payment. Mortgage points are a way for borrowers to pay upfront interest in exchange for a lower interest rate on the loan. Essentially, paying points can reduce the interest rate, which in turn lowers your monthly payments over the life of the loan.
What Are Mortgage Points?
1 point = 1% of the loan amount.
Discount points are used to buy down the interest rate, lowering the overall cost of borrowing.
For example, if you have a $200,000 loan, 1 point would cost you $2,000 upfront (1% of $200,000).
Key Inputs for a Mortgage Points Calculator:
Loan Amount: The total amount you are borrowing (before applying any points).
Interest Rate: The initial interest rate before applying any points.
Points: The number of points you are considering paying upfront. For example, if you're considering paying 2 points, that means paying 2% of the loan amount.
Loan Term: The number of years you will take to repay the loan (e.g., 15, 30 years).
Cost of Points: The upfront cost of the mortgage points, which will be calculated as a percentage of your loan amount.
New Interest Rate: After applying the points, the calculator can show you what your new interest rate might be based on how many points you're paying.
Key Outputs of a Mortgage Points Calculator:
Upfront Cost of Points: The total amount you need to pay upfront for the points, which is calculated by multiplying the loan amount by the number of points you're buying (1 point = 1% of the loan amount).
New Interest Rate: The updated interest rate after purchasing points. Typically, each point lowers your rate by 0.25%, though this varies by lender.
Monthly Payment: Your monthly mortgage payment, which will be lower if you buy points to reduce the interest rate.
Total Interest Savings: The total amount of interest you save over the life of the loan because of the lower interest rate achieved by buying points.
Break-even Point: This is the number of months it will take for the interest savings from the lower rate to outweigh the upfront cost of the points. This helps you determine whether it makes sense to pay for points based on how long you plan to stay in the home.
How It Works:
The mortgage points calculator takes into account the amount of money you're willing to pay upfront for points and uses this to reduce your interest rate. This results in lower monthly payments, but you'll need to pay those points at closing.
For example, let's say you have a $250,000 loan at a 4.5% interest rate and you decide to buy 2 points. The upfront cost would be:
2 points = 2% of $250,000 = $5,000
Now, by paying $5,000, your interest rate might drop to 4.0%. This will lower your monthly mortgage payments over the term of the loan.
Example:
Let's say you are taking out a $300,000 loan with a 4.5% interest rate on a 30-year fixed mortgage. You're considering paying 2 points.
Upfront cost for 2 points: 2% of $300,000 = $6,000.
New interest rate after paying points: Let's assume it drops to 4.0%.
Monthly payment: The calculator would calculate your new monthly payment based on the 4.0% rate versus the original 4.5% rate.
You can see if the savings in your monthly payments justify the upfront cost of paying those points.
Why Use a Mortgage Points Calculator?
Determine Affordability: It helps you evaluate how much you would pay upfront for points and whether the reduced monthly payments will be worth it.
Compare Loan Scenarios: You can compare different scenarios, such as paying points versus not paying points, or paying fewer versus more points, to see which is most financially advantageous.
Long-Term Savings: The calculator helps you understand how much interest you'll save over the life of the loan if you buy points, allowing you to make a more informed decision about whether or not it makes sense to pay them.
Plan for the Future: If you're unsure how long you plan to stay in the home, the break-even point can help you decide whether paying points makes sense based on how long you'll have the mortgage.
Example Calculation:
Let's break down the example above with numbers:
Loan Amount: $300,000
Original Interest Rate: 4.5%
Points Paid: 2 points
Cost of Points: $6,000 (2% of $300,000)
New Interest Rate: 4.0%
Monthly Payment (before points): $1,520.06 (principal and interest at 4.5%)
Monthly Payment (after points): $1,432.25 (principal and interest at 4.0%)
Monthly Savings: $87.81
Total Interest Savings: Over 30 years, you could save $31,600 in interest by paying $6,000 upfront.
The break-even point is the number of months it will take for your savings in interest to cover the $6,000 cost of the points. In this case, it might take 68 months (approximately 5.5 years) for you to break even.
When to Use This Calculator:
When deciding if buying points makes sense for you.
If you're planning to stay in your home long-term and want to reduce your interest costs over time.
If you're comparing two mortgage offers: one with points and one without.