Discount points are prepaid interest that allows you to lower your interest rate. Each point equals 1% of the total loan amount. In general, for each point paid the interest rate would be lowered by
1/8 of a percentage point on a 30-year mortgage.
When you are looking for mortgage lenders you should ask what the interest rate would be with no points and what the rate drops to with points.
Paying discount points is advisable when you intend to stay in a home for some time, because they do lower the monthly mortgage payment. Another positive about points is that they are tax deductible in the year in which they are paid.
In a buyer’s market the buyer may be able to negotiate that the seller pays some of the points instead of significantly dropping the price. Certain loans, such as those backed by the Federal Housing
Authority (FHA), the Veterans Administration (VA), and those that provide assistance for first-time home buyers, may require that the seller pay some of the points.