Discount points are fees a borrower pays the lender at closing to reduce the interest rate on their mortgage, a practice known as buying down the rate. One point typically costs one percent of the loan amount.
Each point paid usually lowers the interest rate by a set fraction, though the exact reduction varies by lender and market. Paying points can make sense for borrowers who plan to keep the loan long enough for the monthly savings to exceed the upfront cost, a threshold called the break-even point.
Points should not be confused with origination points, which are a fee for processing the loan rather than a rate buydown. Discount points may also be tax-deductible in some circumstances.