Banco Bilbao Vizcaya Argentaria : What are mortgage points and do you need them?

The first type of points - origination points - cover the lender's cost of processing the loan. They are a way to pay closing costs, and they can be negotiable, but they typically aren't optional. The number of origination points varies by lender, so be sure to ask about them when you're shopping for a mortgage lender.

The second type of points - mortgage points or discount points - are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is your opportunity to 'buy down' your interest rate, which may lower your monthly mortgage payments.

Since discount points are purely voluntary, it's up to you to determine whether it's worthwhile to spend the extra money upfront in order to reduce your monthly payments. Fortunately, estimating your break-even point is fairly simple, and buying down your rate makes more sense the longer you plan to live in your home.

For example, based on the chart below, buying down the rate would cost $4,000 at closing and save $63 each month. It would take more than five years to recoup that upfront expense, so if you're not planning to stay in that home for at least five years, buying discount points wouldn't make sense.