- Discount points
- Upfront fees paid to the lender at closing in exchange for a lower interest rate. One point costs 1% of the loan amount, so two points on a $300,000 loan cost $6,000. How much each point lowers the rate is set by the lender and varies, which is why this calculator asks for the rate cut per point.
- Break-even point
- The number of months it takes for the lower monthly payment to repay the upfront cost of the points, found by dividing the cost of points by the monthly saving. If you sell or refinance before reaching it, the points cost more than they saved. After it, every remaining month is net savings.
- Rate cut per point
- How much the interest rate falls for each point purchased. A quarter of a percentage point per point is a common rule of thumb, but lenders price points differently and the reduction may shrink as you buy more. Use the figure from your lender’s rate sheet, because the break-even result depends heavily on it.
- Cost of points
- The cash paid at closing for the points: number of points times 1% of the loan amount. It is money spent up front that you recover only gradually through lower payments. Points can sometimes be paid by the seller or deducted on your taxes, neither of which this calculator models.
- Monthly saving
- The difference between the principal-and-interest payment without points and the payment at the reduced rate. It is the return you get each month on the money spent on points. Taxes and insurance are unaffected by points, so they are left out of this comparison.
- Net savings over full term
- Total payment savings over the full loan term minus the cost of the points. It assumes you keep the loan to the last payment, which few borrowers do. Treat it as the best case; the break-even point is the more practical guide if you might move or refinance.
- APR
- Annual percentage rate: a yearly cost of borrowing that folds points and certain lender fees into the interest rate. Buying points lowers the note rate but, because the points count as a finance charge, the APR falls by less. Comparing APRs helps when lenders offer different mixes of rate and points.
- Interest rate
- The annual note rate charged on the unpaid balance. Here it is your base rate before buying points; the calculator subtracts the rate cut for each point to find the rate with points. Both payments are then calculated with standard amortization over the same term, so only the rate differs.
- Loan term
- The number of years over which the loan is scheduled to be repaid. In a points decision, the scheduled term matters less than how long you actually keep the loan. A longer term spreads a given rate cut into smaller monthly savings, which pushes the break-even point further out.
