What are points and when should I pay them?

Points — or discount points — are essentially one-time, pre-paid interest charges on your loan. The more points you pay, the lower the interest rate on the loan and vice versa. Borrowers typically can pay anywhere from zero to 3 or 4 points, depending on how much they want to lower their rates. Discount points are tax deductible.

Each point is equal to 1 percent of the total loan amount. For example if you had a loan amount of $150,000, 1 point would be equal to $1,500.

In contrast to points, an origination fee is a fee charged by the lender to cover the costs of making the loan. The origination fee is not tax deductible.

How do you decide whether to pay points, and how many? That depends on several factors, such as how much money you have available for a down payment, and how long you plan on staying in your house. Points reduce the interest rate, an advantage if you plan to stay in your home for a while. But if you need the lowest possible closing costs, choose a lowest possible point option on your loan program.