In **4 years 2 months** you will break-even on the $1,800 extra paid for points.

Break-Even | 4 years 2 months |

Points Investment | $1,800 |

Monthly Savings | $26 |

Total Savings | $1,843 |

The borrower in this example is better off paying 1 point for the lower mortgage rate than not paying points. The borrower is projected to save more than **$1,800** over the 10 years he/she plans to keep the loan. The break-even on the cost of points is expected to be **4 years 2 months** so if the borrower planned to sell the home, refinance or pay off the loan in less than that time then the mortgage with no points would be better.

Change more / (less) | |||
---|---|---|---|

This mortgage calculator assumes that you itemize your deductions on Schedule A of your Federal tax return and that you qualify for the home mortgage interest deduction without limitation. Tax savings may be reduced or eliminated for higher income taxpayers that have their allowable itemized deductions limited; for taxpayers with loan amounts exceeding the maximum; and other factors. The information and calculators are intended for your independent use as self help tools and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy with regard to your individual circumstances. All examples are hypothetical and for illustrative purposes only. We strongly encourage you to seek personalized advice from qualified professionals regarding all personal finance matters. | |||

Loan Amount | $0 | ||

Interest Rate | (0.250%) | ||

Discount Points | 1 | ||

Discount Points (Paid In Cash) | $1,800 | ||

Monthly Payment (Principal and Interest) | ($26) | ||

For a Holding Period of 10 years | |||

Monthly Costs PI | ($3,089) | ||

Lost Interest - Points | $140 | ||

Lost Interest Monthly Costs | ($118) | ||

Tax Savings - Points | $483 | ||

Tax Savings - Interest | ($1,116) | ||

Reduction in Principal | $1,210 | ||

Net Costs | ($1,843) | ||

Net Savings / (Loss) | $1,843 |

Recommended For You | ||
---|---|---|

» Today's Mortgage Rates | » Get the Best Mortgage | » Should I Pay Points? |

How do you decide if you should pay mortgage points or not? The simple approach of dividing the cost of the points by the monthly savings on your payment does not take into account critical information like the impact of tax deductions and your potential earnings on any savings that could be invested. This example walks you through the decision process.

We assume the borrower is using the mortgage to buy his or her primary residence, plans to keep the mortgage for 10 years, is in the 25% tax bracket and earns 1% on investments. For a 30 year mortgage for $180,000 we compare paying 1 point for a 3.75% rate and paying 0 points for a 4% mortgage rate. After reviewing this example, use the mortgage rates and points calculator to determine whether you should pay mortgage points or not.

Example: Pay Mortgage Points or No Points?

- Break-Even
- The break-even point is the amount of time it will take for your mortgage savings to equal the amount you paid up front. The break-even point for your refinance is the amount of time it will take for your refinance savings to equal the cost of your refinance. The break-even for paying discount points is the amount of time it will take for your savings to equal the amount you paid for points
- Discount Points
- Borrowers may be given the option of paying discount points on their mortgage in exchange for a lower mortgage interest rate. Each discount point is equal to one percent (1%) of the mortgage loan amount. For example, if your mortgage loan amount is $250,000, one point would cost you $2,500 in additional closing costs ($250,000*.01).
- Income Tax Rate
- Your marginal income tax rate is the rate at which any additional dollars of your income would be taxed at.
- Interest
- The portion of your mortgage payment that is due to the interest rate being applied to the principal balance. The Total Interest for a mortgage is the sum of all interest paid over the life of a loan.
- Interest Rate
- The percentage of the principal balance of your mortgage that determines how much interest you must pay. The interest rate on your mortgage may change or remain the same depending on the type of loan you have.
- Investment Earnings
- Your investment earnings are the average annual percentage rate you expect to earn on your investments.
- Loan Amount
- The initial principal balance or your mortgage at closing.
- Principal
- The portion of your mortgage payment that is used to pay down the current balance of your mortgage. The principal balance represents how much you owe on the mortgage.
- Term
- The amortization term is one of the key factors that determine your required mortgage payment. Your required mortgage payment for fully amortizing mortgages is the amount that would result in the mortgage being closest to being paid off by the end of the amortization term. Longer amortization terms result in lower required mortgage payments for fully amortizating mortgages, all other things being equal.