Points, also known as discount points, are a one time fee a buyer can pay a lender to lower the interest rate on a loan (or just to procure a loan). Points are paid at closing, and equal 1% of the loan amount of a real estate property (for example, one point on a $100,000 loan is $1,000).

A lender may require a buyer pay points to acquire a specific loan, as well as bring down the interest. Interest is usually reduced by .25% for each point.

As with many costs associated with a real estate transaction, points are usually negotiable and can be paid by the buyer, the seller or any combination of these parties. Usually, however, a buyer is required to pay points, when applicable.

Before deciding on paying points, it is important to discover the break-even rate. You can do this by comparing the monthly payment for interest rates both with and without points, dividing the difference between this figure and the amount of points you plan on paying up front.

In other words, on a $100,000 loan, each .125% in rate usually costs 1/2 a percentage point, or $500. Each .125% amortizes to approximately $8.70 a month. Dividing the benefit into the cost ($8.70/$500) will uncover the number of months it takes to break even. Using the example illustrated above, 57 months is the break-even point, not accounting for inflation. In other words, if you move before 6 years, you have lost money.

The above example illustrates why having a lower interest rate is not always the least expensive option when considering whether to pay points. It is important to discuss this with your real estate professional prior to making the decision to pay points.