How do lender credits and discount points affect my mortgage costs?

Points, also called discount points, and lender credits swap cash at closing for a different interest rate. Paying points raises what you bring to closing and reduces the rate. Taking a credit does the reverse: less cash due now, a higher rate later.

How those choices affect total cost depends on how long you keep the loan. The CFPB describes asking a loan officer for side-by-side options with and without points or credits, priced over a short, long, and likely holding period, or reviewing the numbers with a HUD-certified housing counselor. That is a way to see the tradeoff, not a direction to choose one option.

Lenders do not always use these words the same way. Some use 'points' for any upfront fee calculated as a percentage of the loan, even when the rate does not fall. Some credits are temporary or are used to offset a problem and are not tied to the rate. When points or credits are connected to the initial rate, paying them should produce a lower rate. Ask the lender to state the effect on the rate. One point equals one percent of the loan amount and is paid at closing. Points appear on page 2, Section A, of the Loan Estimate and Closing Disclosure.