Paying points can lower your mortgage rate

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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 home loan.

Buying a point usually decreases your interest rate by one-eighth to one-quarter of a point.

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 5.25%, the monthly payments on a 30-year loan would be $31 less.

That means it would take 65 months, or almost five and a half 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 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 on your mortgage.

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).

You can use our database to compare the best mortgage rates from scores of lenders based on how many points it loan carries, and see how much you might lower your interest rate by paying points.

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