The break-even analysis on paying points is calculated using what method?

• A. Graphical method
• B. Complex calculus
• C. Trial and error
• D. Simple arithmetic

Answer: (D)

A break-even analysis for paying points is determined by straightforward arithmetic. You compare the upfront cost of the points to the ongoing savings from the lower interest rate. Since the savings accumulate linearly over time, you don’t need graphs, calculus, or trial-and-error.

How it works in practice: calculate the upfront cost of the points (points × loan amount × 0.01). Then determine the monthly savings by comparing the monthly payment at the original rate with the payment at the reduced rate. The break-even period is the upfront cost divided by the monthly savings (or equivalently the upfront cost divided by the annualized savings). If you want it in years, divide by 12 to get years. This direct arithmetic approach is why paying points break-even analysis uses simple arithmetic.