Saving with Mortgage Points in a High-Interest Market: Is It for You?

As interest rates rise, homebuyers are facing increased borrowing costs, prompting many to explore (more of this in wallstreet journals) the option of purchasing mortgage points as a means of mitigating higher monthly payments.

Mortgage points allow buyers to pay an upfront fee to lower the interest rate on their loans, and sellers may also contribute to buying down rates to alleviate transaction costs. Recent research from Zillow reveals that nearly 45% of conventional primary home borrowers purchased mortgage points in 2022 to reduce their monthly mortgage payments, a trend that has persisted into the current year. This figure marks a significant increase from 29.6% in 2021, when interest rates were lower.

The average 30-year fixed-rate mortgage now stands at 6.7%, as reported by Freddie Mac, compared to 5.8% a year ago. Similarly, the average 15-year fixed-rate mortgage has risen to around 6%, up from 4.8% in the previous year. Recognizing the impact of higher rates on purchasing power, experts have been encouraging buyers to consider mortgage points as a strategy to lower their monthly payments.

Stephanie Grubbs, a licensed real estate agent at the Zweben team at Douglas Elliman Real Estate in New York, has actively recommended this approach to her clients.

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By leveraging the potential savings from lowered asking prices, Grubbs highlights the opportunity to buy down the interest rate. Financial advisors and experts suggest that purchasing mortgage points can be an effective strategy in the right circumstances, especially when buyers can afford the upfront costs.

Mortgage points typically refer to a percentage of the loan value, with one point equivalent to 1% of the loan. For instance, on a $300,000 loan, one point would cost around $3,000 and reduce the interest rate by 0.25 percentage points. Lowering the monthly payment through this means can provide more flexibility within individuals’ budgets and enhance affordability.

Before committing to buying mortgage points, prospective homebuyers should consider several factors. Establishing a timeline for living in the new home is crucial, as refinancing shortly after purchasing would not allow enough time to appreciate the upfront payment. Additionally, individuals should evaluate their expected duration of residency, as higher closing costs associated with current rates and home prices could result in substantial financial implications if they decide to move within the first three to five years.

Another alternative to consider is increasing the down payment, which can yield advantages such as greater home equity and potential reductions in monthly payments. However, if additional funds are insufficient to reach a down payment of 20%, which eliminates the need for private mortgage insurance, buying points may have a more significant impact on monthly expenses.

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In certain cases, sellers may offer to buy down the interest rate as a concession to offset costs for buyers, presenting an alternative to traditional point purchases. The concept of a 2-1 buydown mortgage, featuring a low interest rate for the first year and a slightly higher rate in the second year before reaching the full rate for subsequent years, is also worth considering. Exploring these options and consulting with a loan officer can help individuals determine the most suitable decision based on their specific circumstances.

When strategizing for the long term, it is crucial to bear in mind the uncertainty surrounding future interest rate policies of the Federal Reserve. Current projections indicate the likelihood of two more rate hikes this year. While present rates may seem high, it is essential to maintain perspective by considering that mortgage rates in the 1980s reached levels significantly higher than today’s 6%.

By carefully evaluating the potential benefits and costs, prospective homebuyers can make informed decisions about whether purchasing mortgage points aligns with their financial goals and circumstances. To subscribe you just have to enter this link and follow the steps Wallstreet journals