Mortgage Discount Points May Not Be Worth The Cost, According To Freddie Mac Data – Forbes Advisor – Technologist

More prospective homeowners are using discount points to buy down mortgage rates, which have been at historic highs. But that might not be a good deal, according to a new report from Freddie Mac, which found that many borrowers who do not buy points score lower mortgage rates than those who do.

The mortgage guarantor’s 2024 Economic, Housing and Mortgage Market Outlook report examined how often single-family home buyers or refinancers getting 30-year fixed-rate mortgages purchased discount points—and how many points they used.

Discount points represent 1% of the loan amount. By paying this up front, you can generally cut your mortgage rate by a quarter of a percentage point. However, if you expect to move within five to 10 years, you may not save enough on your monthly payments to recover that expense.

The report found that more than half of borrowers paid discount points last year. Yet borrowers who did not pay points generally received a lower mortgage rate than similar buyers who did pay—6.69% versus 6.86%, on average. The researchers were unable to explain exactly why this happened.

Mortgage Borrowers Preferred Using Discount Points Last Year

Freddie Mac’s report focused on borrowers with credit scores of at least 740 and a loan-to-value (LTV) ratio between 75 and 80. Among these borrowers, 58.8% used discount points in 2023—up from 53.6% in 2022 and 31.3% in 2021, when mortgage rates were lower overall.

Discount points were even more popular with people refinancing their mortgages. More than 82% of cash-out refinancers and almost 60% of no-cash-out refinancers used discount points. Refinancers also tended to buy more points than purchase borrowers.

In addition, borrowers with lower credit scores were more likely to pay discount points than those with higher scores.

Alternatives To Buying Mortgage Discount Points

If you are in the market for a home and are looking for ways to reduce your costs or lower your mortgage rate, consider these options:

• Make a larger down payment. If possible, kick off your purchase with a large down payment, which may help lower your overall interest rate. To save up for a larger down payment, focus on budgeting, trimming your expenses and paying off debts.
• Budget for extra monthly payments. Setting up an extra recurring monthly payment can help pay off your mortgage early and save money on interest. Consider strategies like making an extra fixed payment every month or rounding up your monthly payments to the next $100 value.
• Improve your credit score. Higher credit scores typically bring lower interest rates and more favorable terms. To raise your credit score, be sure to review your credit reports, pay off your debts and manage your credit utilization.