Discount Points Break Even Point

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  #1  
Old 02-06-19, 09:05 AM
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Discount Points Break Even Point

Curious why online calculators don't factor in the interest savings when calculating the break-even point. For example, buying 2 points to get the rate from 5.5% to 5% results in a monthly payment of $50 less, with $75 less in monthly interest, and $15 more going towards principal. Shouldn't the break even factor in these things to a certain extent?

Example 1 (5.5% APR)
Monthly Payment: $975
Principal: $185
Interest: $775

Example 2 (5% APR)
Monthly Payment: $925
Principal: $200
Interest: $700

As you can see, at 5% APR, the payment decreases by $50, with $15 more towards principal, and $70 less towards interest. Is this worth it at a cost of 2 points/$3,500? If I factor in the monthly payment only, my break even is 70 months, but when factoring in the extra principal and interest savings, the break even becomes 26 months, which would be worth it.
 

Last edited by mossman; 02-06-19 at 12:00 PM.
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Old 02-06-19, 12:13 PM
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You gave the rates but didn't say how much is being financed.
 
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Old 02-06-19, 12:53 PM
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172k financed. Those number are P/I only. I should also mention I'll probably be selling the house in less than 5 years.
 
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Old 02-06-19, 01:09 PM
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I'll probably be selling the house in less than 5 years.
60 months x $50 = $3000 savings at a cost of $3500.

The only time it's beneficial to buy down a mortgage is when you are there long term and can recoup the initial cost.

In this case it's a net loss!
 
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Old 02-06-19, 01:24 PM
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Was this about a 30 year mortgage at $975/mo @ 5.5% ? Any fees involved other than paying $3,500 to get it to 5%?
 
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Old 02-06-19, 01:40 PM
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60 months x $50 = $3000 savings at a cost of $3500.

The only time it's beneficial to buy down a mortgage is when you are there long term and can recoup the initial cost.

In this case it's a net loss!
Right, but my question was whether the additional principal and lower interest should factor in as well. Not just the lower payment. I suppose it doesn't make sense considering I don't plan on owning it for more than a few more years.
 

Last edited by mossman; 02-06-19 at 02:04 PM.
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Old 02-06-19, 02:09 PM
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Was this about a 30 year mortgage at $975/mo @ 5.5% ? Any fees involved other than paying $3,500 to get it to 5%?
No other fees. There are standard closing costs of course.
 
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Old 02-06-19, 02:15 PM
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I assume you are saying you would continue to pay $975/mo so if you did it that way, it would take about 8 and a half years to "break even" as your gain would be $34.48 month.
If you stayed 30 years then that could be $12,412.80 less interest but that's not your case.
 
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Old 02-06-19, 02:54 PM
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My question was, shouldn't the increase in principal and decrease in interest factor into the equation when calculating the break-even period, as opposed to only the savings in monthly payment?
 
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Old 02-06-19, 04:18 PM
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Yes, they would both factor into the equation. Keep in mind that the calculator is set up to show people how much less of a payment they can make.

You would have to set it up as a new loan if you wanted to change the payment amount. Then you don't really need a refinance calculator. That's why I asked if you intended to make payments of $975/mo and not the lesser amount the calculator is showing you.

I ran it thru as a $172,000 loan @ 5.5% and then a $175,500 loan @ 5% to see what the difference was - using a 30 year time frame.
 
  #11  
Old 02-07-19, 03:23 AM
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My question was, shouldn't the increase in principal and decrease in interest factor into the equation when calculating the break-even period, as opposed to only the savings in monthly payment?
Short answer, yes. it does have an impact but the amount is pennies since the beginning of the loan the payment is interest on the total principal.

If you want that value you can goggle a mortgage calculator and calculate the interest and principal for the time period but the amount you are paying to buy it down is all you need to look at!
 
  #12  
Old 02-08-19, 12:00 PM
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I decided not to buy any additional points, because it wasn't worth it. They did give me 0.125% lower for only $220 which was nice. They split the cost with me. I'm not sure how the math works out, because that would be 0.25% of the total loan to get the rate down by 0.125%, which is basically a half point per 0.25%. I was under the impression that a point was 1%. I guess different banks have different rules.
 
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