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Rising Mortgage Rates Drive Borrowers To Buydown Points

Christine Stuart
Sep 22, 2023
Mortgage Application Pic TRID

Western states lead in adoption as homeowners seek short-term relief.

With the average 30-year, fixed-rate mortgage hitting a 21-year peak in August, homeowners face added affordability challenges, as reported by Freddie Mac. In response, some borrowers are turning to mortgage buydown points as a strategy to temporarily lower monthly payments, according to CoreLogic Economist Archana Pradhan.

Mortgage buydown points allow homeowners to enjoy reduced monthly payments during the initial years of homeownership. For instance, on a $500,000 loan at an 8% interest rate, monthly payments would normally be around $3,670. But with a short-term rate drop to 6%, those payments can decrease to about $3,000. Notably, while mortgage buydown points offer short-term savings, interest rates incrementally increase over time.

Historically, buydown points were more prevalent prior to the Great Recession, Pradhan said. She said lenders often provided them to borrowers who might not have qualified for loans without a complete ability-to-pay verification. However, post the 2010 Dodd-Frank Act, today's mortgages have become more reliable and less risky, ensuring borrowers aren't solely qualified based on initial terms.

Buydown Trends in Sync with Interest Rates

Mortgage buydown points' popularity has surged recently as buydown activities increased notably as the average 30-year, fixed-rate mortgage surpassed the 6% mark, peaking in Dec. 2022. But with continued high interest rates, buydown point utilization has slightly dipped.

Regionally, Western states, including Utah, Colorado, Washington, Idaho, Nevada, and Arizona, show a higher inclination towards mortgage buydown points. The top areas for buydowns include Ogden-Clearfield, Utah, which tops the list with 6% of homebuyers opting for buydown points. It's followed closely by Greeley, Colorado (5.9%), Provo-Orem, Utah (5.8%), Salt Lake City (5.5%), and Denver (5.4%). On average, borrowers choosing buydown points face interest rates 17 basis points higher than those who don't, which according to Pradhan suggests some buyers are prepared to pay more upfront to ensure reduced initial monthly payments.

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