As interest rates have risen, homebuyers are facing higher borrowing costs.
This has led more and more homebuyers to adopt one strategy: buying mortgage points to meet higher monthly payments.
With mortgage points, buyers can pay an upfront fee to lower the interest rate on their loans. In some cases, sellers will help purchase lower rates to reduce transaction costs.
Nearly 45% of traditional home borrowers bought mortgage points to reduce their monthly mortgage payments in 2022, a trend that a recent Zillow study shows will continue this year.
That’s up from 29.6% in 2021, when interest rates were lower.
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The 30-year fixed-rate mortgage is currently averaging 6.7%, according to Freddie Mac, up from 5.8% a year ago. The 15-year fixed-rate mortgage now averages about 6%, up from 4.8% a year ago.
This week the Federal Reserve decided to suspend interest rate hikes to combat high inflation.
As interest rates remain higher, those in the home market lose purchasing power. Some experts have urged buyers to consider buying mortgage points to lower their monthly payments.
Stephanie Grubbs, a licensed real estate agent on the Zweben team at Douglas Elliman Real Estate in New York, recently did just that when one of her clients lowered their asking price.
“This fabulous apartment just went on sale, meaning you can use those savings to lower your price,” Grubbs wrote in the updated ad.
Grubbs, a former financial adviser, said her company began raising the issue of strategy more when the Fed began raising interest rates.
“To be creative, we talk to sellers about offering to offer a purchase at a lower price,” Grubbs said.
Other experts say that buying mortgage points by buyers can be a good strategy for the right situation.
This is especially true if a buyer can afford the additional upfront costs.
Being able to lower the monthly payment can really help give people’s budgets more wiggle room and help them become affordable.
Nicole Bachaud
senior economist at Zillow
Mortgage points refer to the percentage of the loan. According to Nicole Bachaud, chief economist at Zillow, a point is typically worth 1% of the credit value.
If the loan value is $300,000, a point would typically cost $3,000 and lower the interest rate by 0.25 percentage points, she said.
“Being able to lower the monthly payment can really help give people budgets more flexibility and help them become affordable,” Bachaud said.
In addition to the higher upfront costs, homebuyers should also consider other factors before purchasing mortgage points.
Set a schedule for living in your new home
“In most cases, being able to buy points is definitely a significant cost savings,” said Kamila Elliott, certified financial planner and co-founder and CEO of Collective Wealth Partners, a boutique consulting firm in Atlanta. Elliott is also a member of the CNBC Financial Advisor Council.
However, if you buy points and then refinance, you don’t have enough time to increase your upfront payment, Elliott said.
Another important consideration is the schedule of how long you plan to live in the house.
Closing costs are also higher given high interest rates and real estate prices, Elliott said.
So if you move three to five years ago, you could face greater financial damage, she said.
“There could be a huge loss if you can’t stay in the property long enough for those costs to recoup over the time you stay there,” Elliott said.
Consider other alternatives
If you have extra money when buying a home, you can opt for a down payment increase instead.
This can be beneficial because it creates more equity in the house, Bachaud noted. It can also result in lower monthly payments.
If that extra money is enough to bring your down payment to 20% of the home purchase price, you eliminate the need for private mortgage insurance, which increases monthly costs for mortgage borrowers who repay less than those amounts.
However, according to Elliott, buying points may have a bigger impact on your monthly spend than increasing your down payment.
It is cheaper for a seller to buy someone else’s mortgage than for them to accept a discount.
Stephanie Grubbs
licensed real estate agent with Douglas Elliman Real Estate
For example, a point may cost $3,000 to $4,000. But using those amounts for a down payment probably won’t make much of a difference in monthly costs, Elliott said.
If you want to make sure your mortgage payment doesn’t exceed a third of your home income, paying back on points might be a better option, she said.
In some situations, a seller may offer to buy at a lower price, a concession to offset the cost to buyers. Grubbs said she has discussed using this strategy with clients in her real estate practice.
“It costs a seller less to buy someone else’s mortgage than it does if they take a discount,” Grubbs said.
Homebuyers may want to consider a 2:1 buyback, a mortgage that offers a low interest rate in the first year, a slightly higher interest rate in the second year, and the full interest rate in subsequent years.
According to Bachaud, sometimes a 2-1 buyback can also be seller-financed.
Talking to a loan officer can help you make the best decision for your situation, Bachaud said.
Consider the unknowns
How well a home-buying strategy performs over the long term depends on one big unknown: how the Federal Reserve will handle interest rates going forward.
The latest central bank forecasts call for two more rate hikes this year.
Even though today’s interest rates feel high, Elliott often reminds people that homebuyers in the 1980s would have liked access to 6% mortgage rates.