Buying Down Mortgage Rates Deemed Unworthy in 2023 and 2024

In 2023, mortgage rates surged to 23-year highs, prompting many homebuyers to consider purchasing extra discount points to lower their mortgage rates. However, recent data suggests that this strategy may not have been as beneficial as anticipated.

Increased Use of Discount Points

According to Freddie Mac, over half of US borrowers opted to pay discount points in 2023, a significant increase compared to previous years. These points, also known as rate buydowns, involve paying upfront fees at closing to secure a lower mortgage rate.

Negligible Rate Differential

Despite the growing popularity of purchasing discount points, Freddie Mac’s findings indicate that the interest rate difference for borrowers who paid points versus those who didn’t was minimal. The average rate for borrowers paying points was 6.61%, only slightly lower than the 6.69% rate for those who didn’t.

Trends in Refinancing

The trend of purchasing discount points was even more pronounced among individuals refinancing their mortgages. The majority of cash-out and non-cash-out refinancers chose to buy down their rates, reflecting the financial strain many borrowers felt amidst rising interest rates.

Factors Influencing Buyer Behavior

The surge in purchasing discount points may have been influenced by various factors, including the desire to mitigate high interest rate costs and incentives offered by homebuilders. Homebuilders, facing limited inventory availability, utilized rate buydown programs to make homes more affordable for buyers.

Assessment of Cost-effectiveness

While purchasing discount points can lead to lower long-term interest rates and monthly payments, the upfront costs may not always justify the potential savings. Housing experts caution that in today’s market, where rates are gradually decreasing, buying down rates may not be financially prudent for all borrowers.

Considerations for Buyers

Mortgage professionals emphasize the importance of carefully assessing the cost-effectiveness of purchasing discount points. Factors such as breakeven periods and the likelihood of keeping the loan for an extended period should inform buyers’ decisions. Ultimately, buyers should weigh the potential savings against the upfront costs and their individual financial circumstances.