Although there are two different types of points in mortgages, most of the time people are referring to a discount point. Discount points are money you pay as a percentage of your loan. It’s basically prepaying interest in exchange for a lower interest rate over the life of your loan. The more points you pay the lower your rate will be.

A point is equal to 1% of your mortgage loan amount. If your loan is for $200,000 then one point would be equal to $2,000, two points would be $4,000 and so on. There are many different loans available with and without points from zero to three points. Basically when deciding how many points you want you have to decide if you’d rather (and can afford to) pay a higher amount upfront with lower monthly payments or a lower amount in the beginning, but higher monthly points.

The best way to decide how many, if any at all, points you should take is to honestly answer how long you believe you’ll stay in the home. Most point combinations have a break even point somewhere between 4-6 years into the loan. The average mortgage tends to last 7 years, but if you aren’t in a stable job or anticipate upcoming changes in your life then taking points may not be a good fit.

Basically, if you’ll be in your house for less than 5 years don’t pay any points. If you plan on being there longer, figure out how much you can afford to pay and then determine if the break-even point is worthwhile.