As interest rates rose, homebuyers faced higher borrowing costs.
This has led to more homebuyers choosing one strategy, buying mortgage points, as a way to afford higher monthly payments.
Mortgage points allow buyers to pay an upfront fee to lower the interest rate on their loans. In some cases, sellers will help buy at lower rates to help mitigate transaction costs.
Roughly 45% of traditional primary home borrowers purchased mortgage points in 2022 to reduce their monthly mortgage payments, a trend that has continued into this year, according to recent research from Zillow.
This is up from 29.6% in 2021, when interest rates were lower.
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The average 30-year fixed-rate mortgage is currently 6.7% according to Freddie Mac, up from 5.8% a year ago. The average 15-year fixed-rate mortgage is now around 6%, up from 4.8% a year ago.
This week, the Federal Reserve decided to pause interest rate hikes to combat high inflation.
As prices continue to rise, those in the market for a home are losing purchasing power. Some experts have urged buyers to consider buying mortgage points to lower their monthly payments.
Stephanie Grubbs, the licensed real estate agent on the Zweben team at Douglas Elliman Real Estate in New York, did just that recently when one of her clients lowered her asking price.
“This great apartment just has a sale on sale, which means you can use those savings for your sale purchase,” Grubbs wrote in the updated ad.
Grubbs, the former financial advisor, said her firm began rolling out the strategy more when the Fed started raising interest rates.
“In an effort to be creative, we talk to sellers about offering to buy at a lower price,” Grubbs said.
Other experts say that buying mortgage point buyers can be a great strategy for the right situation.
This is especially true if the buyer can afford the additional costs upfront.
Mortgage Score indicates the percentage of the loan amount. One point is usually equal to 1% of the loan’s value, according to Nicole Pachaud, chief economist at Zillow.
If the loan is $300,000, she said, one point would normally cost $3,000 and lower the interest rate 0.25 percentage points.
“Being able to lower that monthly amount can really help give people more wiggle room in people’s budgets and help them get to affordability,” Pachaud said.
In addition to the higher initial costs, homebuyers must weigh other factors before purchasing mortgage points.
Set a schedule for living in your new home
“For most cases, being able to buy for points certainly saves a lot,” said Camilla Elliot, a certified financial planner and co-founder and CEO of Collective Wealth Partners, an Atlanta-based consulting firm. Elliott also sits on the CNBC Financial Advisor Board.
However, if you buy points and then refinance, that won’t allow enough time for your down payment to appreciate, Elliott said.
Another important consideration is your schedule for how long you plan to live in the home.
As prices and home prices go up, that means closing costs go up, Elliott said.
Thus, if you moved three to five years early, you could take a bigger financial hit, she said.
“There can be a huge loss if you can’t stay on that property long enough to amortize those expenses over the time you’re there,” Elliott said.
Consider other alternatives
If you have extra money when buying a home, you may instead choose to increase your down payment size.
This can be beneficial, Pachaud noted, as it creates more equity in the home. It may also reduce your monthly payments.
If that extra money were enough to bring down the down payment to 20% of the home’s purchase price, it would eliminate the need for private mortgage insurance, adding to monthly costs for mortgage borrowers who make less than those amounts.
However, you may see a greater impact on your monthly expenses by buying points rather than increasing your down payment, Elliott says.
A point might cost $3,000 to $4,000, for example. Putting those amounts toward a down payment likely won’t make much difference to your monthly costs, Elliott said.
If you want to make sure your mortgage payments don’t exceed a third of the income you get from the home, paying off points may be the best option, she said.
In some cases, the seller may offer to lower the price, which is a concession to help offset costs to buyers. Grubbs said she has discussed using this strategy with clients in her real estate practice.
“It’s less expensive to buy someone’s mortgage than it is to have the seller reduce the rate,” Grubbs said.
Homebuyers may want to consider going with the 2-1 purchase, which is a mortgage that offers a low interest rate for the first year, a slightly higher rate for the second year and a full rate for the following years.
According to Pachod, the purchase may also be 2-1 seller financing at times.
Pachaud said talking to a loan officer can help you determine the best decision for your situation.
agent in the unknown
How well any homebuying strategy rates well in the long run depends on one big unknown: how the Federal Reserve will handle interest rates in the future.
The latest forecasts from the central bank call for two more rate hikes this year.
While interest rates today are high, Elliott said she often reminds people that homebuyers in the 1980s would have loved access to 6% mortgage rates.