Buyers sometimes choose to pay a one-time charge called mortgage “points,” which buys them a lower interest rate on their mortgage. Usually paid at closing, each discount point costs 1 percent of the mortgage amount. For example, a point on a $300,000 loan costs $3,000. Each point you buy will reduce your interest rate by a specific percentage. For example, one point might reduce your interest rate by .25 percent; two points reduces the rate by .50 percent, and so on. The rate of discount will vary, so you will need to confirm the specific amount of the reduction with your mortgage lender.
A lower interest rate will lower your monthly mortgage payment. The monthly savings will often exceed what was paid in points in several years’ time. The cost of the points is generally tax deductible for the year that you paid for the points. Talk to your tax advisor to learn more about this benefit to determine if the upfront cost makes sense for your current finances, or if it is better to keep the cash on hand.