When researching mortgage rates, you'll find quotes from lenders that include both loan rates and "points."
What is a point?
In the simplest terms, a point is a fee equal to 1 percent of the loan. A 30-year, $150,000 mortgage might have a rate of 7 percent, but come with a charge of 1 point, or $1,500. ($150,000 x 0.01 = $1,500)
There are two kinds of points borrowers can pay:

Discount points
These are actually prepaid interest on the mortgage 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 three or four points, depending on how much they want to lower their rates. These points are tax-deductible.

Origination points
These are charged by the lender to cover the costs of making the loan. They are tax-deductible as long as they are not paid in lieu of other closing costs.

Which is better, points or no points?
That depends on a number of factors, such as how much money you have available to put down at closing and how long you plan on staying in your house.
In the chart to the right, a 30-year fixed mortgage of $100,000 at 7.5 percent interest with no points results in a monthly payment of $699 (payment includes principal and interest). But if you pay three points at closing (that's $3,000) you can bring the interest rate down to 6.5 percent, with a monthly payment of $632. The savings would be $67 per month, which is great. Although it would take 45 months to earn back the $3,000 spent upfront via lower payments, this approach would save you $24,173 in total interest.
Alternatively, if your extra cash is going towards home renovations, or other investments, or if you think you'll be in the home for a relatively short period of time, opting for a higher interest rate and fewer points may be your best strategy. See chart

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