Discount Points Break-Even Calculator

How Discount Points Work

A discount point is prepaid interest. You pay a lump sum at closing and receive a lower rate for the life of the loan. One point equals 1% of the loan amount. The rate reduction per point varies by lender and market conditions, but the industry convention is roughly 0.25 percentage points per point purchased.

On a $340,000 loan, one point costs $3,400 and two points cost $6,800. The monthly payment difference between the original rate and the bought-down rate is your monthly savings. Divide the total cost of the points by that monthly savings and you get the break-even month — the point at which the upfront cost has paid for itself. Every month after break-even is pure savings. The calculator runs this math automatically and shows the cumulative net position at yearly intervals so you can judge whether the holding period is realistic for your plans.

The Refinance Trap: When Points Money Is Lost

Points become a losing bet if you refinance or sell before break-even. Many borrowers on personal-finance forums describe buying points to lock in a lower rate, only to refinance again a year or two later when rates dropped further. The points money was spent, the break-even clock reset, and the net result was worse than having taken the higher rate with no points in the first place.

The calculator includes a field for your expected holding period so you can test this scenario directly. If you enter five years and break-even is at month 48, you earn just twelve months of net savings. If break-even is at month 66, you never reach it and the points were a pure cost. A common guideline: if there is a realistic chance you will move or refinance within five to seven years, paying zero points and accepting the higher rate often leaves you ahead. The money that would have gone to points can instead increase your down payment, reducing PMI or your overall loan amount.

The rate reduction per point varies by lender. The 0.25% convention used here is illustrative. Ask your lender for the exact rate sheet before deciding.