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 typically reduces the interest rate on your loan by one-eighth to one-quarter percentage point.

Lets say you're borrowing $200,000 at 5.5%. Paying 1 point, or $2,000, would allow you to lower your rate to about 5.375% or 5.25%, reducing the payments on a 30-year loan by $15 to $30 a month.

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).

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