Points

The term points can mean different things in different contexts.

With regard to stock, a point represents a $1 change in market price, so if a share of stock rises two points, its price has risen $2. With bonds, a point is a 1% change above or below its par, or face, value, so if a bond has a par value of $1,000, a point equals $10.

But in the case of futures and options, a point usually represents a price change of one-hundredth of one cent. And you may also hear about points if you're applying for a mortgage.

In this case, points - also called discount points - are prepaid interest some lenders require at closing as a condition of approving the loan. One point is 1% of the mortgage principal, or 100 basis points. So if you are borrowing $200,000 and your lender charges 2 points, you owe $4,000, in addition to other closing costs.

Prepaid interest is tax deductible in most cases, and your long-term interest rate will be lowered slightly - often 0.25% or 25 basis points - for each point you pay. But because points increase your closing costs, you may decide to choose a lender that doesn't require points if you plan to move or refinance within a few years.