How this instrument works
A discount point is prepaid interest: pay 1% of the loan amount at closing and the lender trims the note rate, typically by a quarter percentage point, though the exact reduction is a rate-sheet decision the lender makes fresh each morning against that day's mortgage-bond pricing — nothing standardizes it. Two lenders quoting the identical rate without points can offer meaningfully different reductions per point, which is why Rate reduction per point is a required input here rather than a fixed constant.
The number that actually matters is the break-even period: divide what the points cost by the monthly payment they save, and you get the number of months of ownership needed before the discount pays for itself. A loan officer showing a rate sheet, a buyer comparing two competing offers, and a refinancer deciding whether to pay down a new note all read this figure the same way — as a countdown against how long they expect to keep the loan, not against the loan's full term.
The math only tracks the payment difference. It ignores the time value of the cash spent on points — money handed over today is worth more than the same dollars trickling back as monthly savings over five years — and it assumes the loan runs untouched to the break-even date. Refinance, sell, or get bought out of the note before that month arrives and the points were a straight loss, regardless of how attractive the discounted rate looked at the closing table.
- Enter Loan amount and the Rate without points your lender quotes with zero points purchased.
- Set Discount points purchased to the number of points you're weighing, and Rate reduction per point to what your lender's rate sheet actually offers per point.
- Match Loan term, years to your note.
- Read Cost of points and Rate after points, then compare Payment without points against Payment with points.
- Check Break-even period, months against how long you actually expect to hold this loan before refinancing or selling.
Worked example — 1 point on a $300,000 loan at 7%
Borrow $300,000 at a 7% quoted rate over 30 years and the lender's sheet reduces the rate by 0.25 points for every discount point bought. Purchasing 1 point costs Loan × Points ÷ 100 = $300,000 × 1 ÷ 100 = $3,000 upfront, and it drops the rate to 6.75%. The unbought-rate payment works out to $1,995.91 a month; at 6.75% it falls to $1,945.79 — a Monthly payment savings of $50.11.
Divide the $3,000 cost by that $50.11 monthly savings and the break-even lands at 59.86 months — just under five years. Anyone confident they'll keep this exact loan, without refinancing or selling, past month 60 comes out ahead by paying the point; anyone who expects to move house or refinance within five years would have kept more cash by skipping it and taking the 7% rate.
Questions
How is a discount point different from a lender's origination fee?
A discount point is optional and buys a lower rate — you choose how many to purchase, and that number sets the trade in this calculator. An origination fee is the lender's charge for underwriting the loan and is owed regardless of the rate you end up with; it never lowers the note rate, so it doesn't belong on the points-cost side of this formula at all.
Why does my break-even number look different from my lender's estimate?
Lenders sometimes quote break-even against a payment difference that folds in taxes or escrow, or they round the rate reduction to a cleaner number than their actual rate sheet supports. This instrument uses exactly the rate reduction you enter and the raw principal-and-interest payment, so feed in your lender's real per-point reduction — from the Loan Estimate, not a marketing flyer — to match their figure.
Is a 0.25% reduction per point typical?
It varies with the lender and the day's bond market, but 0.125% to 0.375% per point is the common range on a 30-year fixed loan, and some lenders price the first point more richly than the second or third. Ask for the actual rate sheet rather than assuming a quarter point, since Rate reduction per point drives the entire break-even result.
Does buying points make more sense on a shorter loan term?
Not automatically — a shorter term means fewer months of savings to recover the same upfront cost, which can push the break-even period close to or past the loan's own length even when the monthly dollar savings look similar. Run Loan term, years at the actual term you're financing; a break-even computed on a 30-year assumption will understate the cost on a 15-year note.
What happens if I plan to sell before the break-even month?
Selling or refinancing before Break-even period, months means the points never paid for themselves — the roughly $50-a-month savings never accumulated to cover the $3,000 spent buying the rate down, so the discount was a net cost. That is exactly the comparison this tool is built to run: hold-period expectation against the break-even number, not against the loan's full term.
Can points be negative — do lenders ever pay me to take a higher rate?
Yes — those are sometimes called lender credits, and the formula here runs the same arithmetic in reverse: a negative Discount points purchased makes Cost of points come out negative and Rate after points come out higher than the quoted rate. Enter a negative value to model a credit toward closing costs instead of a purchase.
References
- CFPB — Using lender credits and discount points
- CFPB — Explore mortgage loan options
- Federal Reserve — Consumer's guide to mortgage settlement costs
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.