Should I Pay Points to Lower My Interest Rate? Many mortgages come with the option to pay points in order to receive a lower interest rate. One point is equal to one percent of the mortgage amount. Trying to decide which is the better plan- taking the higher interest rate, but saving the dollar amount of the points or paying the points and getting the lower interest rate- can be a difficult choice. If you decide to pay points, essentially, you decide to pay now. If you opt to take the higher interest rate and not pay any points, then, you opt to pay later.
Quite possibly, one of these scenarios is more cost effective than the other. Use this calculator to determine the potential savings of each plan of action. Additionally, this calculator can determine the monthly savings in interest on the loan. These savings are the reason that you would pay the points. Your monthly payments will be lower because you will be paying less interest due to the lower interest rate received with the purchase of points.
Fortunately, this clever calculator can even calculate the breakeven point, or the time it will take for you to recoup or realize a savings equal to the amount spent on points. The time it would take for the savings of lower monthly payments to make up for the upfront cost of the points paid is the breakeven point.
Homeowners should also consider the length of time that they intend to remain in the home. If you are not going to be there long enough to recoup the cost of the points, then there really isn't any reason to pay them. Additionally, with a first time mortgage the points are tax deductible and so you will see an immediate savings at tax time. With a refinanced loan, the points cannot be listed as a deduction on your tax form, so you will not realize the same initial savings.
Calcualtor Legend
- Amount: Enter the total amount of money that you are borrowing, including any fees that you will include in the loan amount.
- Interest Rate: Enter the interest rate that is associated with the loan as a percentage.
- Interest Rate with Points: Enter the interest rate that is offered with the number of points that you intend to pay.
- Length: Enter the number of years that you will have the loan.
- Points: Enter the number of points that you will pay to acquire the loan. A point is equal to one percent of the loan amount.
- Your Savings Rate: Enter the interest rate that the bank offers for savings.
DISCLAIMER: There is NO WARRANTY, expressed or implied, for the accuracy of this information or it's applicability to your financial situation. Please consult your own financial advisor.
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