Mortgage points (also called discount points) are optional upfront fees you can pay to your lender at closing to reduce your mortgage interest rate. Each point costs 1% of your total loan amount and typically lowers your interest rate by approximately 0.25%, though the exact reduction varies by lender and market conditions. For example, on a $300,000 mortgage, one point would cost $3,000 and might reduce your rate from 7.0% to 6.75%. You can purchase multiple points to achieve greater rate reductions, or even fractional points (like 0.5 points) for proportional savings.

The decision to buy points is fundamentally a break-even calculation. Using the example above, if that 0.25% rate reduction saves you $50 per month ($600 annually), your $3,000 investment breaks even after 60 months (5 years). If you plan to stay in the home longer than the break-even period, buying points saves you money; if you sell or refinance before that, you lose money. Points make the most financial sense when you have extra cash at closing (without depleting your emergency fund), plan to stay in the home long-term, currently face high interest rates that you want to offset, or are in a high tax bracket (points may be tax-deductible). They rarely make sense if you might move or refinance within a few years, have limited cash and need to preserve funds for other purposes, or if the break-even period is too long for your comfort. It's important to distinguish discount points (which reduce your rate) from origination points (which are lender fees that don't affect your rate).