How the calculator works
The cheapest mortgage is the one that costs you the least over the time you actually keep it. For each offer, the calculator adds up the upfront lender cost (discount points plus other origination charges, minus any lender credits), then the interest and mortgage insurance you pay each month. It does this month by month for the full term, so you can read off the total at 3, 5, 7 and 10 years, or any horizon you type in.
Principal is left out on purpose. Every dollar of principal you repay reduces your balance, so it is not a cost. Counting only fees, interest and mortgage insurance gives you the true cost of borrowing for each offer.
The calculator also finds the crossover: the month when the ranking flips. An offer with points starts behind because you paid more at closing, then catches up because its rate is lower. If you are likely to sell or refinance before the crossover, the other offer wins.
Worked example
You are borrowing $400,000 for 30 years and have two Loan Estimates. Offer A is 6.25% with $4,000 in points (one point) and $1,495 in other origination charges. Offer B is 6.75% with no points, $1,295 in origination charges and a $2,000 lender credit.
| Keep the loan | Offer A (6.25%, 1 point) | Offer B (6.75%, $2,000 credit) |
|---|---|---|
| Monthly principal & interest | $2,463 | $2,594 |
| Upfront lender cost | $5,495 | −$705 |
| 1 year | $30,362 | $26,165 |
| 3 years | $79,173 | $78,993 |
| 5 years | $126,616 | $130,461 |
| 7 years | $172,510 | $180,374 |
| Full 30 years | $492,128 | $533,276 |
Offer B is cheaper at first because its credit more than covers its fees. Offer A's lower payment (about $132 a month less) wins after 38 months. If you expect to keep the loan for seven years, Offer A saves about $7,900. If you might move or refinance within three years, Offer B is the safer choice.
The rules behind it
- Points and credits. According to the CFPB, one point equals 1% of the loan amount. Points lower your rate in exchange for paying more at closing. Lender credits lower your closing costs in exchange for a higher rate.
- Use the same kind of loan. Every lender uses the same Loan Estimate form, and you must get it within three business days of applying. Ask each lender for the same loan type, term and down payment so the numbers line up.
- What to compare. Origination charges (Section A) are set by the lender, so compare their total. Section B lists services the lender requires and chooses, so compare that total too. Section C, taxes and prepaids mostly depend on providers you pick and on the property, not the lender.
APR and edge cases
- APR assumes you keep the loan for the full term. It spreads upfront costs over 30 years, so it flatters offers with points. The calculator shows your entered APR next to a rough estimate from the charges you entered. A gap usually means the lender counted other finance charges, such as prepaid interest or some Section B fees.
- Mortgage insurance. PMI on a conventional loan is assumed to stop when the scheduled balance reaches 78% of the home value. FHA annual premiums can last much longer, so choose “whole time” for FHA offers. See the PMI calculator and the FHA loan calculator.
- Different loan amounts. If one offer finances costs or uses a different down payment, the totals are not apples to apples.
- Rate locks. A Loan Estimate's rate can change until it is locked. Compare offers issued on the same day, and read about rate locks.
What to do next
Read how to read a Loan Estimate, test whether a single offer's points are worth it with the mortgage points calculator, and see your full monthly payment with taxes and insurance in the mortgage calculator.