Discount points are a type of fee that allows you to buy down the interest rate on a mortgage.

One point equals 1% of the loan amount, and each point you buy can reduce the interest rate on your loan.

Buying a point usually decreases your interest rate by one-eighth to one-quarter of a point.

Let’s say you’re borrowing $200,000 at 4.5%. If paying 1 point, or $2,000, allowed you to lower your interest rate to 4.25%, the monthly payments on a 30-year loan would be $30 less.

That means it would take 65 months, or almost five and a half years, to recoup the cost of paying that point.

If you plan to live in the home — and keep the loan — longer than that, then it’s the right move. If you can’t commit to the home for that loan, you should pass on paying points.

There’s a tax benefit to paying points, too.

When buying a home, the entire amount you pay for discount points is tax deductible the year of the purchase, because discount points are prepaid interest.

But if you are refinancing, you have to spread that deduction out over the life of the loan.
Let’s say you refinanced into a 20-year loan and paid $2,000 in discount points, you could only deduct $100 a year ($2,000 divided by 20 years).

Use our “How much can I borrow” calculator to see how big a home loan you can afford.

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