What are discount points and how do they work?

Discount points are lender credits that let you make tradeoffs in how you pay for your mortgage and closing costs.  They lower your interest rate in exchange for an upfront fee.  By buying points, you pay more upfront, but you receive a lower interest rate and therefore pay less over time. Points can be a good choice for someone who knows they will keep the loan for a long time.

Points are calculated in relation to the loan amount. Each point equals one percent of the loan amount. For example, one point on a $100,000 loan would be one percent of the loan amount, or $1,000; two points would be two percent of the loan amount, or $2,000; and so on. Each point lowers the loan's interest rate by one-eighth to one-quarter of a percent. The points are paid at closing and, therefore, increase your closing costs.