Mortgage points are lender fees or advance interest that a borrower pays up front in exchange for a lower interest rate for a certain part of the loan term, often over the life of the loan.

Also known as “discount points,” these points are based on a percentage of the loan, with each point equal to 1% of the loan.  So one point costs $2,000 for a $200,000 mortgage loan and $3,000 on a $300,000. 

However, a point does not mean your interest rate is reduced a full percentage point. Typically a one point reduction is anywhere from an eighth of a percent to a quarter of a percent, depending on the lender.

Don’t confuse “mortgage points” with “loan origination fees,” or “loan processing fees,” which are also sometimes called “points,” and are simply application processing fees also equal to 1% of the loan amount — these don’t reduce your interest rate. Mortgage points used to pre-pay interest are tax-deductible.