Discount Points

When you’re getting a mortgage, you'll get pitched by the lender the ability to pre-pay or pay down or pay off points, in advance of getting your mortgage written. These clever ways of packaging the way you pay rent on your money are cleverly called points, or mortgage points. Discount points are a way you can prepay some interest up front to your lender in exchange for a reduced interest rate on the life of the mortgage. In the same way that paying a higher down payment can save you money in the long-run, so too can paying discount points. (They're almost always tax-deductible as well, so it's a trade-off of cash flows to figure out the right answer. If you have the cash handy, it's often a good idea to pay them and reduce your interest rate.)

One discount point is one percent of the mortgage amount (you can think about this as $1k for every $100k, if that makes it easier). The more discount points you can pay, the less interest you’ll owe on the loan...which could be 15, 30, or more years. Yeah, ouch.

Fun fact: discount points doesn’t always need to be paid out of pocket. Confusingly enough, discount points can be rolled into the loan balance you’ll owe, but typically only in a refinance or special mortgage (like FHA) situation.