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How a Mortgage Points Calculator Works

April 20, 2009

It’s a question that puzzles many people who want to get a mortgage: Should you pay discount points upfront to get a lower interest rate?

The answer can be figured out with a mortgage points calculator, also called a “discount points calculator” or simply a “points calculator.” A points calculator is designed to help you figure out whether it makes sense to pay points and whether you would save money if you did so.

Using a Mortgage Points Calculator
A point is equal to 1% of your loan amount, and the more discount points you pay, the lower your interest rate should be. A basic mortgage points calculator assumes that one point knocks off one-quarter of one percent or 0.25% of the interest rate. Most borrowers are offered different combinations of points and interest rates, so it’s important to discuss the results that you get from the points calculator with your lender.

The mortgage points calculator works a lot like other types of mortgage calculator tools do. To use the calculator, you’ll need to enter your loan amount, interest rate without points, discount points, interest rate with points and loan term into the calculator.

The mortgage points calculator will then calculate your monthly payments with and without points, the cost of the points and your monthly savings.

Mortgage Points Calculator shows savings
The calculator won’t tell you definitively whether you should pay discount points, but instead will show you how long you would need to keep your mortgage to recoup the cost of the points through the monthly savings on your mortgage payment. For example, the points calculator might tell you that you would have to keep your mortgage for two years and eight months before you’d break even on the cost of the discount points. After that, according to the points calculator, the savings you’d get from the lower interest rate would be more than the cost of the points. So if you plan to keep your mortgage that long, points might make sense.

When you use a mortgage points calculator, keep in mind that:

• A discount points calculator typically is designed only for fixed-rate mortgages, not ones that have an adjustable interest rate.
• A discount points calculator typically doesn’t factor in the effect of a higher or lower interest rate on the amount of mortgage interest that you can deduct on your income tax return.
• The payment that’s calculated by a points calculator doesn’t typically include property taxes or insurance.

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