A point is the same thing as a discount point or origination fee. Points refer to added fees which you can use to purchase a lower interest rate. One point is the equivalent of one percent of your loan amount.
The percentage that buying points lowers your rate will depend on the market at that time and which loan product you are acquiring. Buying points will get you more traction on a lower term loan like an ARM or 15 year fixed than it will on a 30 year fixed.
The way to determine whether buying points is worth it is through running a break-even analysis.
Let’s say a point saves you $50 a month and costs $4,000 to purchase. That is a $4000/50=80 month break even, which is 6 years and 8 months. You’ll need to retain the loan for that time period in order to recoup the cost of the point, and then for every month after that you save $50 a month.
Use this math with your specific situation to decide whether points are right for you. You’ll also want to consider the opportunity cost of that money being allocated to purchase points rather than retained for investment in the market or other functions. The longer you plan to hold onto the loan, the more that points make sense for you.