Buying Down The Rate

In their ongoing quest for affordability, more buyers are turning to buying points to pull down the interest rates on their loans, according to a new study of Home Mortgage Disclosure Act (HMDA) by Zillow. Mortgage points, also known as rate buydowns and discount points, are an option available to homebuyers who wish to reduce their monthly payments by “buying down” the interest rate on their loan. The points are often presented in the form of an upfront fee; essentially, borrowers pre-pay interest to lower their rates and, therefore, the amount they pay every month for the life of the mortgage.

The 2/1 buydown, a similar program that has likewise gained traction, lowers the interest rates on a loan for its first two years before reverting in the third year; usually, the rate is two percentage points lower in the first year and one percentage point lower in the second. Almost 45% of conventional primary home borrowers paid mortgage points in 2022, Zillow found. That’s far more than recent history, considering that interest rates from 2019 to 2021 were historically low. Just 27.3% of homebuyers opted to purchase points in 2019, while 28.4% and 29.6% of buyers in 2020 and 2021, respectively, paid mortgage points. As in previous years, borrowers in 2022 were more likely to buy points to purchase homes in the top and middle price tiers, likely because decreasing your interest rate has a larger effect if the principal on your mortgage is higher.

Source: Scotsman Guide