Discount Points Calculator for a Mortgage

Buying a home is an exciting time. With all the options, getting a mortgage to purchase a home can feel overwhelming. One choice you'll need to make when getting a mortgage is whether or not to buy discount points. What is a discount point? How does it work with your mortgage?

	Zero Point Rate	With Points
Loan Amount
Interest Rate (%)
Discount Points
Loan Term (Years)

Monthly Payment Without Points
Payment with Discount Points
Total Discount Points Cost
Monthly Savings
Break-even (Months)
Total Interest
Total Interest Saved with Points
Less Discount Points Paid
Total Interest Savings

Here are the key things to know about mortgage discount points:

A mortgage discount point is an upfront fee for a lower interest rate. Each discount point typically costs 1% of your total loan amount. Paying points reduces your interest rate, which lowers your monthly mortgage payments. This can help make homeownership more affordable.

For example, if you get approved for a $200,000 loan at 5% interest, each point would cost $2,000 (1% of $200,000). If you pay two points ($4,000 total) upfront, the lender may reduce your rate to 4.5%. This means you pay more upfront, but your monthly payments are lower. Over the life of a 30-year fixed mortgage, even a slight reduction in your interest rate can save you thousands.

Key Takeaways

There are a few key factors to consider when deciding whether to buy mortgage discount points:

How long do you plan to stay at home? Points make more sense if you'll stay put longer. With a shorter stay, you may not recoup the initial cost through interest savings before you move.
Your monthly budget: Can you afford higher monthly payments to save on points? Or is the upfront cost of points too high? Run the numbers to see which option suits your budget.
Interest rates. When rates are low, points may not lower your rate enough to justify the cost. When rates are high, it can be worthwhile to buy down the rate.
Your down payment. With a larger down payment, you may be able to afford discount points more quickly. With less cash down, you may want to put your funds toward down payments and closing costs instead.
Loan type. Discount points may make more sense with a fixed-rate versus an adjustable-rate mortgage since your rate is locked in for the long haul.

How to Calculate Discount Points

Now that you know the basics of mortgage discount points, let's look at how to calculate them. Here are the key steps:

Find out your loan amount and interest rate from your lender without points—for example, a $200,000 loan at 5% interest.
Ask how much each point costs. With the above example, each point would be 1% of $200,000, or $2,000.
Determine how many points you want to buy to lower your rate. Say you buy 2 points for $4,000.
Calculate your new interest rate with the points. In this case, 2 points may lower your rate to 4.5%.
Plug the original rate, new rate, and costs into a discount points calculator. This will estimate your break-even time and interest savings over the loan's life.
Use these numbers to decide if the initial cost is worth the long-term savings for your situation.

There are a few other vital things to know about mortgage discount points:

For flexibility, you can buy partial points in increments (ex: 0.25, 0.5, 1.25).
Discount points are tax-deductible in the year you buy the home. This can help offset the prepaid cost.
Your lender ultimately decides the rate reduction when you buy points. It may not be a complete 0.25% per point.
You can add points to a mortgage at closing or finance them into your loan amount. You don't necessarily need cash upfront.
Shop with a few lenders to compare point costs and rate reductions. Offers can vary.

Summary

Purchasing loan discount points may appear intricate, yet investing time in calculating the figures specific to your circumstances can empower you to make a well-informed choice.

Evaluate the upfront expenses alongside the potential long-term interest savings when assessing your alternatives. Feel free to inquire with your lender, seeking clarity on discount points, before proceeding with your home loan.

SOURCE:
VA-Guaranteed Home-Loans for Veterans

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