Definition
Fees paid at closing to lower a mortgage interest rate; one point equals 1% of the loan amount.
What it means
Discount points, often just called points, are prepaid interest. You pay extra at closing in exchange for a lower rate for the life of the loan. One point costs 1% of the loan amount, and how much it lowers the rate depends on the lender and the market. Points make sense only if you keep the loan long enough for the monthly savings to exceed the up-front cost, the break-even point. The opposite is a lender credit, where you accept a higher rate in exchange for lower closing costs. The CFPB explains both options and notes they appear on the Loan Estimate. Points paid on a loan to buy your main home may be deductible if you itemize, subject to IRS rules.
Example
On a $400,000 loan, one point costs $4,000 and might lower the rate from 6.75% to 6.5%, saving about $66 a month. The break-even point is about 61 months, or roughly five years.
Illustrative numbers only. Your situation will differ.