Calculate Mortgage Points Accurately

In order to secure your best mortgage package, you must calculate mortgage points accurately. One mortgage point is equal to one percent of a mortgage.  Discount mortgage points allow a borrower to manipulate the interest rate that he/she pays on a loan. Discount points are tax deductible.  Origination mortgage points pay for the overhead associated with brokering a loan.  

Things Needed to Calculate Mortgage Points

In order to calculate mortgage points correctly, you will need to know basic facts about your home loan.

  • The amount of money that you are attempting to borrow.
  • The term of the loan.
  • The value of one point (usually equal to one percent of the loan).
  • The number of points that you are being offered.
  • How long you plan on staying in your home.
  • Your monthly payments without the points.
  • The total fee that you will pay for the points.

Step 1 - Know Your Tradeoff

If you are purchasing discount mortgage points, you will be decreasing the interest rate that you will pay on your home loan. Usually, one discount point decreases the interest rate by one-quarter. If you are not planning on staying in your home for very long, paying points is a waste of money. Paying a lower interest rate for a short period of time does not justify paying a higher down payment at your closing in the form of points.

Step  - Calculate Your Savings

The internet provides many sites that allow you to calculate your monthly savings. You can also figure out your savings on your own.  Determine the amount that you would pay monthly, without the points. Your broker can help you figure out your monthly payments or you can use the interest rate and the total value of the loan to calculate the payments by yourself. Then, depending on how many points that you want to pay, determine what your new interest rate will be. Calculate what your monthly payments will be with the points.

Step 3 - Find Your Break-Even Point

The break-even point is the amount of time that it will take for you to benefit from paying points instead of paying higher interest. This point is calculated by subtracting your payments with the points from your payments without the points. Then, take that difference, and divide the money that you pay for the points by this number. Internet mortgage calculators will determine this rate for you.