Points, origination points, and discount points are synonymous.

Points are an upfront closing cost and are a charge based on your loan amount.  One point refers to a charge of one percent of the loan amount.  On a $400,000 loan amount one point is $4,000.

Rates and points are connected to each other. The greater amount of points paid upfront, the lower the interest rate.  On most loan programs there are numerous options each day with regard to points.  The best option for you depends on how long you plan on having the loan for.

To make that determination, you want to calculate the break even point.  Look at the amount of the upfront cost for the points compared to the monthly savings from the lower interest rate, and divide.  So if a $4000 upfront charge saves $97/mo, you’d need to have your loan for 42 months to break even.  Every month after that adds to your savings.

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 buying points will make sense for you.

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.