What is a mortgage point and should I buy one?

Mortgage points, also called discount points, are a form of prepaid interest. You pay a fee at closing in exchange for a lower interest rate for the life of the loan. Each point costs 1% of the loan amount. On a $300,000 loan, one point costs $3,000. The rate reduction varies by market conditions and lender, but typically one point reduces the rate by about 0.25%. The decision to buy points comes down to your break-even point. Divide the cost of the points by the monthly savings. If points cost $3,000 and save you $50 per month, your break-even is 60 months, or five years. If you plan to stay in the home beyond five years, buying points saves you money. If you move or refinance before then, you lose money on the points. Points may also be tax deductible as mortgage interest. Consult your tax advisor about the deductibility. In a low-rate environment, points are less attractive. In a higher-rate environment, they can provide significant long-term savings.