Should you buy points?
Buying points when you close your mortgage can reduce its interest rate, which in turn reduces your monthly payment. But each "point" will cost you 1% of your mortgage balance. This calculator helps you determine if you should pay for points, or use the money to increase your down payment.
Click on the "View Report" button to review your information.
A point represents 1% of the total loan amount. By paying a discount point, you can lower your interest rate. In general, you can knock off 1/4 to 1/8 of a percent off your interest rate for each point you pay. Points are generally tax deductible if you itemize.
As a general rule, it takes about 5 to 7 years to recoup the cost of paying a point up front. The illustration shows that you can save $3,175 over 10 years, however, if you input 8 years as the number of years in the home before you sell or refinance, you will recoup the full $2,000 or 2 points. In this case, it takes about 8 years to break even. The $3,175 savings is computed by taking the total interstest savings of $3,780 minus the difference in Equity which is $605.
If you prefer to save the $2,000 instead of buying the points, you could break even if you invested it at a savings rate of about 6% over the 10 year period taking. Use our Savings Calculator to compute the total savings.
Make sure you study the illustration carefully and read the definitions before inputting your own numbers.