Discount points are a type of fee that allows you to buy down the interest rate on a mortgage.

One point equals 1% of the loan amount, and each point you buy can reduce the interest rate on your loan.

Buying a point used to decrease your interest rate by one-eighth to one-quarter of a point. But some lenders are now reducing interest rates by a half-point or more for every point you buy.

Let's say you're borrowing $200,000 at 5.5%. If paying 1 point, or $2,000, allowed you to lower your interest rate to 5%, the monthly payments on a 30-year loan would be $55 less.

That means it would take you 36 months, or three years, to recoup the cost of paying that point. If you plan to live in the home -- and keep the loan -- longer than that, then it's the right move.

Our mortgage points calculator can help you decide if buying points could save you money in the long run.

If you are buying a house, the entire amount you pay for discount points is tax deductible the year of the purchase, because discount points are prepaid interest.

But if you are refinancing, you have to spread that deduction out over the life of the loan. So if you refinanced into a 20-year loan and paid $2,000 in discount points, you could only deduct $100 a year ($2,000 divided by 20 years).