Mortgage Points Break-Even
Mortgage Points Break-Even
Months of payments needed for the monthly saving from a lower rate to repay the up-front cost of the points that bought it. Points cost a percentage of the loan; the saving is the difference between the two amortizing payments.
When to use: Use before paying points. If you expect to sell or refinance before the break-even month, the points are not worth buying.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| BreakevenMonths | Break-Even (months) | Payments needed to recover the cost of points | integer |
| LoanAmount | Loan Amount | Mortgage principal | $ |
| Points | Points Paid | Cost of points as a fraction of the loan (1 point = 0.01) | % |
| RateWithout | Rate Without Points | Annual rate if no points are paid | % |
| RateWith | Rate With Points | Annual rate after buying points | % |
| n | Loan Term | Amortization term in years | years |
| m | Payments per Year | Number of payments per year | integer |
Real-Life Examples
Example 1: One Point for a Quarter Percent
A $300,000 30-year mortgage. Paying 1 point ($3,000) lowers the rate from 6.5% to 6.25%.
Given
Step-by-Step
The points pay for themselves after about 5 years. Anyone likely to move or refinance sooner should skip them.
Example 2: Two Points for Half a Percent
A $500,000 30-year mortgage. Two points ($10,000) cut the rate from 7% to 6.5%.
Given
Step-by-Step
Again about five years. A rule of thumb: each point typically buys about a quarter percent and breaks even in five to six years.
Frequently Asked Questions
No. This is the simple payback most lenders quote. A discounted version would push the break-even later, making points slightly less attractive than this shows.
Discount points on a primary-residence purchase are often deductible in the year paid in the US; rules vary and change. This formula ignores taxes.