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A new analysis from Zillow revealed that nearly half of mortgage applicants opted to pay for points when taking out a home loan last year.
These optional costs allow homeowners to buy back their interest rate at closing.
Doing so lowers their monthly mortgage payment for the duration of the loan term.
And it saves them money on interest through a lower mortgage rate, meaning each payment goes towards the principal.
But are points really a good deal for homeowners? and do they make sense when interest rates are High,
Too Many Homeowners Are Paying Mortgage Points These Days
Zillow Home Loan Analysis, Used statistics From the Home Mortgage Disclosure Act (HMDA), it was found that approximately 45% of conventional primary home borrowers paid mortgage discount points in 2022.
As mentioned, these points allow borrowers to obtain lower mortgage rates. They are a form of prepaid interest.
Resulting in lower monthly mortgage payments and lower interest expense over the loan term.
Interestingly, a lot more homeowners are paying these points than in previous years.
For example, when mortgage rates were at or near record lows, very few applicants paid points.
To put this into perspective, only 29.6% of borrowers paid off the points in 2021, compared to 28.4% in 2020 and 27.3% in 2019.
Why, it’s probably because the mortgage rates offered were so low that there was little need to pay down the points. And maybe less desire.
Zillow notes that buying points are most often used by low-income borrowers (those who make between 30% and 50% of the median income for their area).
These are the people who are most stable at keeping the monthly payments low.
At the same time, borrowers were more likely to pay points in the top and middle price tiers than for homes in the lower price tiers.
Simply put, a lower mortgage rate makes a bigger impact on a larger loan amount.
However, those who earned less than 30% of their area’s median income scored the highest overall buying points for homes in that lower price tier.
Another issue is recently because the mortgage market has been so volatile, many lenders have made mortgage points mandatory.
[Why Mortgage Lenders Are Requiring Upfront Points]
Paying down one point could lower your mortgage rate by 0.25%
While this can certainly vary, Zillow found that mortgage applicants may need to pay 1% of the loan amount in order to lower the interest rate by 0.25%.
For example, on a $300,000 loan amount with a rate of 6.75%, it could cost $3,000 to lower that rate to 6.5%.
The difference in monthly payments would be approximately $50 and approximately $18,000 in interest would be saved over the entire 30-year loan term.
Knowing that, you’ll need to determine whether it’s worth that upfront cost. To do this, you figure out the break-even period, which is how long it takes to recoup those costs and start saving money.
In our example, it might take about four years of reduced payments and interest to make that advance point worth it.
And that’s the rub. You have to live in the home and have the mortgage for at least that long to really get the benefit.
Note that for the time being, mortgage discount points may go a bit further in case of rate reductions.
Be sure to shop around with several lenders to see how far one point can go, as this can vary by company.
Is a temporary buydown a better option than paying points?
While paypoint was not as popular when mortgage rates were rock-bottom, it may have been underutilized.
After all, someone with a fixed tenure of 30 years at 2-3% would surely want to hold on to that home loan for as long as possible. Hence paying in advance can be a winning move to save more.
Conversely, someone who takes out a mortgage set at 6.5% today might not want to keep it for very long. Or pounce at the first opportunity to refinance.
There is also an expectation that mortgage rates may ease towards the end of the year and into 2024. Thus, paying points when closed can be money-losing.
Remember, if you don’t keep the loan past the break-even period, you won’t actually save money on upfront costs.
This makes the argument for a floating buy, such as a 2-1 buy, perhaps more compelling.
You can save the money for the first two years and get it paid off by the lender, builder or seller.
And once a refinance opportunity comes along, you can swap out your mortgage for a new one at a lower rate.
Instead of having a longer mortgage, you can take advantage of lower payments for the first few years.
It’s less commitment and possibly more cost-effective. You’re only using the reduction in payments for the year until mortgage rates ideally go back up.
Homeowners paying discount points may feel trapped in their loan knowing that they will “lose money” if they refinance before break even.
However, borrowers who opt for a temporary purchase must make sure they can make the actual mortgage payments if the refinancing opportunity doesn’t come along.
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