With interest rates still rising, more home buyers are turning to buying mortgage points as a way to save.
Nearly 45% of conventional primary home borrowers opted to purchase mortgage points in 2022 as a way to reduce their monthly payment, according to a recent analysis of data from the Home Mortgage Disclosure Act (HMDA) by Zillow Home Loans.
That is up from 29.6% in 2021, 28.4% in 2020, and 27.3 percent in 2019, years when interest rates were at historic lows.
Borrowers who opted for a cash-out refinance loan (on a conventional loan for a primary home) bought even more points in 2022, Zillow said — 57.8% purchased points, compared to 48.4% in 2021, 44.2% in 2020, and 41.3 in 2019.
Mortgage points, also known as discount points, allow buyers to pay an upfront fee to buy down the interest rate on a loan. The term "points" is a common way to refer to a percentage of the loan amount. When buyers choose to buy points, they are essentially pre-paying interest up front in exchange for a lower rate and monthly payment.
While buying points is more common now, it's most often used by borrowers who make less than their area's median income (AMI) — generally between 30% and 50% of their AMI — and are most concerned about monthly payments. Those who make less than 30% of AMI purchased the most points overall for homes in the bottom price tier, Zillow found.
Regardless of income level, borrowers were more likely to buy points for homes in the top and middle price tiers than for homes in the bottom tier. That could be because the impact of lowering interest rates is greater on more expensive mortgages, Zillow said.
Buyers need to determine whether paying up front to reduce the fee in favor of lower monthly payments is worth it. In general, mortgage applicants need to pay 1% of a loan amount to cut the interest rate by 0.25%. A break-even calculator can help buyers determine whether paying more now to buy points can save them money in the long run, Zillow said.
"Buying points can be a great option to improve monthly affordability — there are many different mortgage products, including buying points and the 2/1 buydown buyers can explore," said Erika Kerry, loan officer at Zillow Home Loans. "These options are good examples of why it is so important to work with a knowledgeable loan officer. The loan officer should be a partner in the buying process, helping explain options so buyers can make an educated decision."
Affordability remains a top concern for home shoppers. A recent Zillow analysis found that nationally, home values are about 25% above where they would need to be for affordability to return to historical norms.
