Discount Points are simply up-front interest. As such, they tend to reduce the interest rate on the loan. This reduction may be beneficial to you if you have the cash to pay more points up front and want to lower the interest rate you’ll pay year after year.

Lenders quote points as a percentage of the mortgage amount. Usually you are required to pay points at the time you close on your home purchase. If a lender offers a loan that has 2 points, it simply means that you must pay 2 percent of the loan amount as points. On a $300,000 loan, that’s an up front charge of $6,000.

If you are considering paying points to lower the interest rate on your mortgage, you may want to make sure you will live in the home long enough to take advantage of the savings.

The interest you pay on your mortgage is not the only cost. Lenders should quote you an Annual Percentage Rate (APR) along with the interest rate that includes finance charges and all other charges and fees related to the mortgage process.