Discount Point Mortgage Calculator
Use our Discount Point Mortgage Calculator to determine if you should pay discount points to lower your interest rate. A discount point is an upfront fee that you can choose to pay to reduce your mortgage rate and monthly payment. If you decide to pay discount points you pay more in upfront closing costs but you save money because your mortgage payment is lower. We recommend that you use our Discount Point Mortgage Calculator to compare loans with different combinations of points and rates to decide if paying discount points is right for you.
How Our Discount Point Mortgage Calculator Works
A discount point equals 1% of your loan amount and you can elect to pay fractions of a point or multiple points. For example, you can decide to pay .5 discount points (a half a point) 1 point, or 2.5 points -- the choice is up to you. The more points you choose to pay, the lower your mortgage rate should be.
Use our calculator to compare multiple mortgages with different discount points and interest rates. Input the mortgage amount, term, rate and discount points for up to three loans. For example, you can compare a loan with a 5.000% interest rate and no discount points to a loan with a 4.750% rate and one discount point to a loan with a 4.500% rate and two discount points. You can compare numerous combinations of discount points and interest rates.
The calculator shows you the total cost of the discount points, which you pay at closing, as well as your estimated monthly payment and total interest expense. The calculator identifies which mortgage offers the lowest combination of interest rate and discount points, the lowest monthly payment and lowest total interest cost. You can use this information to understand how long it takes you to recover the cost of the discount points.
If your monthly payment savings is low, it can take a long time to recover your upfront cost, in which case paying points may not make sense. If you recoup your costs in a relatively short period of time, then paying points is good idea as long as you can afford the extra upfront expense. Use this information to determine if it makes financial sense to pay discount points.
What Mortgage Borrowers Should Know About Discount Points
What is a Discount Point
A discount point is an optional fee that borrowers can elect pay to lower their mortgage rate. One discount point costs the borrower 1.0% of the mortgage amount. For example, one discount point on a $250,000 mortgage costs the borrower $2,500 ($250,000 * 1.0% = $2,500). Borrowers pay discount points to "buy down" or lower their mortgage rate. Lenders usually offer borrowers the ability to pay discount points in half-point increments up to a certain limit so you can pay a half of a discount point, one discount point, one and a half discount points, and so on. Use our Discount Point Mortgage Calculator to determine the total cost of discount points based on your loan amount.
What is a Discount Point Worth?
One discount point typically equates to a .250% reduction in interest rate. For example, if a lender quotes you a 4.000% mortgage rate with no discount points, your mortgage rate if you decide to pay one discount point should be 3.750% and 3.500% if you decide to pay two discount points. The more discount points you pay, the lower your mortgage rate should be and the lower your monthly mortgage payment should be. Borrowers should make sure that each discount point they pay reduces their mortgage rate by at least .250%. Additionally, borrowers should compare mortgage proposals with different interest rates and discount points for multiple lenders to find the loan with the best terms. Comparing mortgage proposals also enables borrowers to verify that discount points are "worth" the same across multiple lenders are result in the same reduction in interest rate.
When You Should Pay Discount Points
Discount points are an upfront cost that you recover by paying a lower monthly mortgage payment which means you recover the cost of the discount points over time. For example, you may decide to pay $3,000 for one discount point to reduce your monthly mortgage payment by $50, or $600 per year. In that scenario, you recover the cost of the discount point in five years -- $3,000 (cost of discount point) / $600 (savings per year) = 5 years to recover the cost of the discount point. As a general rule, because of the length of time it usually takes to recover the cost of discount points, you should only pay discount points if you plan to own the property you are financing for at least five years. The amount of time it takes to recover the cost of discount points varies depending on your interest rate, mortgage amount and the number of discount points you pay but in general it does not make sense to pay discount points if you intend to sell your home and pay off your mortgage in less than five years.
Discount Points are 100% Optional for Borrowers
It is completely up to borrowers to decide if they want to pay discount points. Although discount points are charged by the lender they are totally optional and borrowers ultimately decide if they want to pay them based on their financial objectives. Discount points should not be confused with origination points or other mandatory fees lenders charge to process your mortgage. Our Discount Point Mortgage Calculator enables you to understand the financial impact of paying discount points so you can make an informed decision.
Discount Points May Be Tax Deductible
Because a discount point is effectively an upfront interest expense, the cost of points is usually tax deductible just like the interest you pay as part of your monthly mortgage payment. Although the mortgage tax deduction varies depending on many factors including your loan amount and tax bracket, the ability to deduct all or part of the cost of discount points offers an extra financial benefit in addition to lowering your interest rate. As with all tax matters, we recommend that you consult a tax professional or accountant to confirm how the mortgage interest deduction applies to you.
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Should I Pay Mortgage Discount Points?
Review our in-depth explanation of mortgage discount points including an example that compares the monthly mortgage payment and total interest expense over the life of a loan for a mortgage with and without discount points
Mortgage Rates
Compare mortgage rates and fees from top lenders near you. Comparing proposals from multiple lenders is the best way to save money on your mortgage
How Much Are Mortgage Closing Costs?
Review our comprehensive overview of mortgage closing costs including an informative example. Understanding how much mortgage closing costs are may affect your decision to pay discount points
Ask a Mortgage Expert
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Sources
“What are (discount) points and lender credits and how do they work?” CFPB. Consumer Financial Protection Bureau, August 3 2017. Web.