What are discount points and how do they work?

Discount points are fees paid at the closing of the loan for a reduced interest rate. One discount point costs 1% of your mortgage loan amount and can reduce your interest rate by about 0.25%. Essentially, you are prepaying part of your interest up front in order to lower your monthly payment.

Over time, the savings from the lower interest rate may outweigh the cost of the discount point. When considering whether points are right for you, make sure you run the numbers to know how long it will take for the upfront cost to be worthwhile.