If you are purchasing a home or planning to refinance your current mortgage your lender may offer you the option to pay "points" at the time of closing. The lender will send you a good faith estimate and you may notice that your down payment will be higher when you pay points. Before simply tossing the idea of paying points aside because of the higher down payment, you need to be sure that you understand what exactly points are before you make that decision. It's a decision that could save you thousands of dollars in the long run.
One thing to consider when getting a home mortgage loan are points. Points are also known as "mortgage points", "loan origination fees", or "discount points". Points are up-front mortgage interest fees paid on a loan to reduce the initial interest rate. At the simplest form, paying points is a trade off between paying money now versus paying money later.

One point is equal to 1 percent of the loan amount. So, say you purchase a home and your mortgage amount would be $250,000. If you paid one point, you would pay $2,500 up front.

Lenders are often willing to reduce the interest rate on your mortgage in exchange for you paying points. When you apply for a loan, ask the lenders how much they are willing to reduce your rate in exchange for paying 1 point.

Is it smart to take points? Well, the answer depends. The number of years you stay in your house can help determine if paying points at closing in exchange for paying a lower rate is a better deal than paying zero points at a higher interest rate level. So what is a good time horizon you ask? That depends on the situation but as a general rule if you plan on staying in your house over a short time frame, less than 5 years for example; paying points wouldn't make sense because you will be paying more in points than you will save in interest. You need to be sure you will keep the loan long enough to recoup these costs through your lower monthly mortgage payment. If, however, you plan on staying in your house for 10 years or longer, points will pay off over time.

The IRS considers points to be a form of prepaid interest. This means they are tax deductible (as long as you itemize your deductions). If you are purchasing a home the points are generally deductible in the year you purchase your property. This is true even if the seller pays for your points. If you are refinancing your mortgage, points must be amortized over the life of the loan.