Mortgage Points Breakeven Calculator

What are mortgage points?

A mortgage point is prepaid interest that reduces the interest rate. Lenders will typically offer loan options with and without points. One point equals 1% of the loan amount. Because it's considered interest, it is deductible but spread out over the life of the loan. For a 30 year loan, you would be able to deduct 1/30 of the points paid each year.
There are also negative points which give you a higher interest rate in exchange for a credit for closing costs.
A mortgage with points will have a higher APR. The APR reflects the total cost of a loan and is a better way to compare different loans.

Is it better to pay more points for a lower interest rate?

You will pay less interest over the life of the loan if you pay points upfront. What matters is if you plan to hold this loan beyond the breakeven point. Let's say you have the option to reduce the interest rate from 5.75% to 5.5% by paying 0.75 points. Paying 0.75 points on a $500,000 loan will cost $3,750 but it reduces your monthly payment to $2,838.95 instead of $2,917.86. It will take 48 months to breakeven on the cost of the points.
Paying the points will save you a total of $32,157.60 over the life of the loan. If you have the money and if you don't sell or refinance before the breakeven point, then paying points is better.
Use this calculator to determine how long it will take you to breakeven if you pay points.