What are points?

In real estate, the term "point" refers to 1% of the total mortgage loan amount. Buyers often pay lenders this supplemental fee, calculated in points, to get a better interest rate on a particular mortgage.

For instance, a lender may offer you a choice of two 30-year mortgages: the first at 8.5% with no points, and the second at 8% with an additional three points. If the loan is for $100,000, those three points will cost you an extra $3,000 up front--but you'll get a payback of significantly lower monthly payments ($840.85 vs. $877.57) for the lifetime of the loan.

Many lenders will advise you to pay the points for the better rate if you can afford it, especially if you plan on keeping the home for more than a few years. Like interest, the money you pay for points may be tax-deductible, and the investment may pay for itself through savings generated by lower monthly payments. We suggest you call your tax preparer.