Discount points are prepaid interest you pay a lender at closing to permanently reduce the interest rate on a loan. One point usually costs 1% of the amount borrowed and buys a rate cut of roughly 0.25%, but whether that upfront cash actually pays off hinges on one number: how long you keep the loan. This discount points calculator compares your monthly payment with and without points, then shows the break-even month when your cumulative monthly savings finally exceed what you paid.
Type in your loan amount, the rate your lender quoted with no points, and how many points you are considering. Every figure updates instantly: the dollars due at closing, your new note rate, both monthly payments side by side, the monthly saving, the break-even period, and the total interest saved if you hold the loan to maturity.
How to Use
- Enter the Loan Amount — the principal balance you are financing, after your down payment and before closing costs. On a $400,000 home with 20% down, the loan amount is $320,000.
- Type your Interest Rate (no points) — the lender's par quote with zero discount points. This is the baseline your bought-down rate is measured against.
- Set Discount Points to Purchase. Start at 1.0 to model the standard deal, or step down to 0.5 to test a half-point buydown.
- Adjust Rate Cut per Point if your lender quoted an unusual grid. The classic convention is 0.25%, but volatile rate environments sometimes deliver 0.375% per point or more.
- Change Cost per Point only if your lender is not using the standard 1%-of-loan rule. Most charge exactly 1% per point, so leave this at 1.0 unless your loan estimate says otherwise.
- Choose the Loan Term — 30 years is the default, but the math works the same for 10-, 15-, or 20-year fixed loans.
Read the result card against your own timeline. The break-even month is the pivot: stay past it and every extra month is pure savings; move, sell, or refinance before it and the points lose money.
What Discount Points Actually Are
A discount point is not a fee. It is interest you prepay today so that every future payment is smaller. The lender effectively lets you front-load a chunk of interest in exchange for a lower note rate for the life of the loan. The standard market convention looks like this:
- One point costs 1% of the loan amount. On a $400,000 loan, one point is a $4,000 closing charge.
- One point buys roughly a 0.25% rate reduction. A 7.00% par quote becomes 6.75% after one point and 6.50% after two.
- Points are often tax-deductible as mortgage interest when you itemize, which can lift the real return a little further.
Origination points are a different animal: those are lender fees for making the loan and buy you no rate reduction. This calculator models discount points only.
The Break-Even Formula
The entire decision collapses into one ratio:
Break-Even Months = Cost of Points ÷ Monthly Savings
The monthly savings comes from the standard amortization formula M = P × r(1 + r)ⁿ / ((1 + r)ⁿ − 1), applied twice — once at the par rate and once at the bought-down rate — with the difference between the two payments being your monthly win.
Worked example on a $400,000 loan at 7.00% for 30 years. One point costs $4,000 and drops the rate to 6.75%. The no-points payment is about $2,661.21, and the with-points payment is about $2,594.39 — a saving of $66.82 each month. Dividing $4,000 by $66.82 gives a break-even of roughly 59.9 months, just under five years. Over the full 30-year term, the lifetime interest saving is about $20,054 on a $4,000 outlay. If the rate is ever set to 0%, the engine splits the principal evenly across the number of months instead of dividing by zero.
When Discount Points Make Sense (and When They Do Not)
Buying points is effectively a guaranteed, after-tax-style return equal to the spread between your par rate and your next-best low-risk use of cash. It pays off most when:
- You plan to stay in the home well past the break-even point — ideally seven years or more.
- You have cash at closing beyond your down payment and emergency fund.
- You do not expect rates to fall and trigger a refinance, because a refi resets the clock and strands the upfront cost.
Skip points when:
- You expect to move, sell, or refinance inside the break-even window.
- You are stretching your down payment; keeping the cash as a larger down payment may remove PMI and be worth more.
- You would have to borrow the money to pay for the points.
A common middle path is to buy just one point: it keeps the break-even short while still locking in meaningful savings.
Examples
Example 1 — The standard $400,000 loan. A borrower locks 7.00% on a $400,000, 30-year loan and buys one point for $4,000, dropping the rate to 6.75%. The monthly payment falls from $2,661.21 to $2,594.39, saving $66.82 per month. They break even in about 60 months and, if they keep the loan all 30 years, save roughly $20,054 in lifetime interest. They plan to stay ten years, so the points pay off comfortably.
Example 2 — A jumbo loan where dollars scale up. On a $1,000,000 loan at 7.00%, buying two points costs $20,000 and cuts the rate to 6.50%. The monthly payment drops from about $6,653.02 to $6,320.68 — a saving of $332.34 per month. The break-even is about 60.2 months, and the lifetime saving over 30 years is around $99,644. Because the savings scale with loan size, points on larger mortgages are usually the most rewarding.
Example 3 — Zero points (the no-buydown baseline). Leaving Discount Points at 0 means no upfront cost, no rate reduction, and no break-even math to manage. The two payments are identical, which is the right call when you are unsure how long you will stay or would rather keep closing costs low.
Example 4 — The quick-mover trap. On the same $400,000 loan, the buyer in Example 1 gets transferred after only three years (36 months). They paid $4,000 in points but collected just 36 × $66.82 ≈ $2,406 of savings — about $1,594 underwater on the points. This is why checking the break-even against your own timeline matters more than the lifetime saving number.
FAQ
How much does one discount point cost?
One discount point typically costs 1% of the loan amount. On a $400,000 loan that is $4,000; on a $1,000,000 loan it is $10,000. Lenders sometimes price points slightly above or below 1%, so confirm the exact dollar figure on your Loan Estimate and use the Cost per Point field to match your quote.
How much does a point lower my interest rate?
A single discount point usually cuts your APR by about 0.25%. For instance, a 7.00% par rate becomes 6.75% after one point and 6.50% after two. In volatile or tight markets the reduction can run 0.25%–0.375% per point, so ask your lender for the exact buydown grid and enter it in the Rate Cut per Point field.
How is the discount points break-even calculated?
The break-even period equals the upfront cost of the points divided by the monthly payment savings they produce. On a $400,000 loan, one point costs $4,000 and saves about $67 per month, so break-even is $4,000 ÷ $67 ≈ 60 months. Stay past that point and every extra month is net savings; sell or refinance before it and the points cost more than they ever saved.
Is it worth paying discount points?
Points are worth it if you will keep the loan well past the break-even point — generally planning to stay in the home seven years or more. They are less worth it if you expect to move, sell, or refinance within a few years, because the upfront cost will not have been recovered. Compare your expected holding period against the break-even months this calculator shows.
Are discount points tax-deductible?
Discount points are generally treated as prepaid mortgage interest and may be deductible on Schedule A when you itemize, subject to IRS limits. The deduction often has to be spread across the life of the loan rather than claimed all at once. Consult a tax professional, because whether and how you can deduct points depends on your closing details and current tax law.
Should I buy points or put a larger down payment?
Both lower your monthly cost, but differently. A larger down payment reduces the principal you pay interest on and can remove PMI; points reduce the rate on the principal you still borrow. If your down payment is under 20%, pushing extra cash toward down payment to drop PMI often beats buying points. If you already have 20% down and plan to stay long-term, points can deliver a strong guaranteed return.
Can I negotiate how much points cost?
Yes. Points, like the base rate, are negotiable, and different lenders will quote different buydown grids. Shopping two or three lenders and comparing both the par rate and the points price is the best way to confirm you are getting a real deal rather than a marketed one.
Disclaimer
This discount points calculator is provided for informational purposes only and does not constitute financial, lending, tax, or investment advice. Estimates assume the standard 1%-per-point and 0.25%-rate-cut conventions and the fixed amortization formula; actual lender pricing, buydown grids, fees, and tax treatment vary by institution, market, credit profile, and program. The break-even and lifetime-savings figures are illustrations, not offers. Always confirm your exact rate, point cost, and closing terms directly with a licensed mortgage professional before buying points.