Discount points are upfront fees you can pay at closing to reduce the interest rate on your mortgage. One point equals 1% of your loan amount. On a $400,000 loan, one point costs $4,000.
Each point typically lowers your rate by roughly 0.25%, though the exact reduction varies by lender and market conditions. Paying points only makes sense if you'll keep the loan long enough to recover the upfront cost — calculate the break-even by dividing the point cost by the monthly savings.
Discount points are tax-deductible in the year paid for purchase mortgages, and can be deducted over the life of the loan for refinances. Always weigh paying points against putting that cash toward your down payment or reserves instead.