What are mortgage discount points?

Mortgage points (also called discount points) are upfront fees paid to the lender at closing in exchange for a lower interest rate. One point equals 1% of the loan amount. Paying one point on a $300,000 mortgage costs $3,000 and typically reduces the rate by 0.25%. Points make sense if you plan to keep the loan long enough to recoup the upfront cost through lower monthly payments — this is called the break-even point. Divide the cost of the points by your monthly savings to determine when you break even. If you plan to sell or refinance before then, paying points may not be worth it.