When shopping for a mortgage you will likely hear the term "points." But what are they? Actually, there are two kinds of points.

Discount points are charged for reducing or "paying down" the interest rate. In other words, if you want a lower interest rate you might have to pay one point or half a point.

Origination points are a type of fee lenders charge for preparing the mortgage and making the loan. Itâ??s their profit on the transaction.

Either way, one point equals 1% of the loan amount.

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).

You can also choose to get a mortgage that charges no points. To determine if paying points makes sense for you, use our points calculator as a guide.