It is possible that ‘buying down’ your interest rate on your mortgage with discount points (a form of prepaid interest) will save you money in the long run. Use this calculator to help determine if paying additional discount points in exchange for a lower interest rate is a good option for you.
Enter the term of your mortgage in years.
Enter the loan amount for all three loans.
Years To Sell or Refinance
Enter the number of years you plan to hold this mortgage before you either sell the property, refinance or pay it off.
Enter the annual interest rate that you want to use for this loan.
Discount points are a form of pre-paid interest that you can pay as a means of obtaining a lower mortgage interest rate. One point equals 1% of the loan amount. Enter the discount points for this loan.
Interest rate for each loan.
Product Type for each loan.
The duration of each loan. An ARM (Adjustable-Rate Mortgage) is a mortgage loan
where the interest rate on the note is periodically adjusted based on a variety
of indices. An ARM is amortized using a 30 year term and "life of the loan" is the
ARM term. A 5 year ARM would have a term of 60 months (5 years).
Principal & Interest Payment
The principal and interest payment for each loan based on the term and rate. ARM
loans are amortized using a 30 year term and will usually either convert to another
loan type or have a balloon payment due.
Total discount points paid when the loan is originated.
This is the payment difference between loan 1 and the other two loans. Loan 1 should
have the highest interest rate and payment. If not, the values will be 0.
This is the number of years it will take to breakeven on the discount points paid.
If you plan to hold your mortgage longer than this value you will be better off
paying the discount points.
Savings Until You Sell or Refinance
Total amount you will save after you breakeven on the discount points you paid.
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"Mortgage Points - What's the Point?" is an insightful article from Investopedia.
The U.S. Department of Housing and Urban Development (HUD) offers a guide to "Looking for the Best Mortgage."
The HomeLoanLearningCenter.com provides step-by-step information
on how to become financially literate.