As interest rates rosewith which home buyers were confronted higher borrowing costs.
This has led more home buyers to opt for one strategy, buying mortgage points, as a way to pay 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 lower rates to help reduce transaction costs.
Nearly 45% of current home borrowers purchased mortgage points to lower their monthly mortgage payments in 2022, a trend that continues this year. recent research from Zillow.
That’s up from 29.6% in 2021, when interest rates were lower.
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A 30-year fixed-rate mortgage currently averages 6.7% by Freddie Mac, up from 5.8% a year ago. A 15-year fixed-rate mortgage now averages about 6%, up from 4.8% a year ago.
This week the Federal Reserve made a decision suspend interest rate hikes introduced in the fight against high inflation.
As rates remain higher, those looking for housing are losing purchasing power. Some experts have urged buyers to consider buying mortgage points to lower their monthly payments.
Stephanie Grubbs, a licensed real estate agent on the Zweben team at Douglas Elliman Real Estate in New York City, recently did just that when one of her clients dropped their asking price.
“This fabulous condo just had a price reduction, which means you can use those savings to lower your rate,” Grubbs wrote in the updated ad.
Grubbs, a former financial adviser, said her firm started to bring that strategy more when the Fed started raising interest rates.
“In an effort to be creative, we’re talking to sellers about offering a rate reduction,” Grubbs said.
Other experts say that buyers buying mortgage points can be a great strategy for the right situation.
This is especially true if the buyer can afford the additional costs up front.
Being able to lower that monthly payment can really help give people more wiggle room in their budgets and help them achieve affordability.
Nicole Bachaud
senior economist at Zillow
Mortgage points indicate the percentage of the loan. According to Nicole Bachaud, chief economist at Zillow, one point is worth 1% of the loan’s value.
If the loan is worth $300,000, one point would typically cost $3,000 and lower the interest rate by 0.25 percentage points, she said.
“Being able to lower that monthly payment can really help give people more wiggle room in their budgets and help them achieve affordability,” Bachaud said.
In addition to higher upfront costs, homebuyers should consider other factors before purchasing mortgage points.
Establish a timeline for living in your new home
“In most cases, it’s definitely a significant cost savings to be able to buy points down,” said Kamila Elliott, a certified financial planner and co-founder and CEO of the company Partners in collective wealth, a boutique consulting firm in Atlanta. Elliott is also a member of the CNBC Financial Advisor Council.
However, if you buy points and then refinance, there won’t be enough time for your upfront payment to appreciate, Elliott said.
Another important consideration is your timeline of how long you plan to live in the home.
With high rates and home prices, that means closing costs are also elevated, Elliott said.
As a result, if you move three to five years ago, you may take a bigger financial hit, she said.
“There could be a huge loss if you can’t stay in that property long enough for those expenses to be amortized over the time you’re there,” Elliott said.
Consider other alternatives
If you have extra cash to spare when buying a home, you may choose to increase your down payment instead.
This can be beneficial because it creates more equity in the household, Bachaud noted. It can also lower your monthly payments.
If that extra money is enough to bring your down payment to 20% of the home’s purchase price, it would eliminate the need for private mortgage insurance, which increases monthly costs for mortgage borrowers who put down less than those amounts.
However, you may see a bigger impact on your monthly spending by buying points rather than increasing your down payment, Elliott said.
Buying out someone’s mortgage costs the seller less than lowering the price.
Stephanie Grubbs
licensed real estate agent at Douglas Elliman Real Estate
For example, a point can cost $3,000 to $4,000. But putting those amounts toward a down payment likely won’t make much of a difference in your monthly costs, Elliott said.
If you want to make sure your mortgage payment doesn’t exceed one-third of your take-home income, then paying off points might be a better option, she said.
In some situations, the seller may offer a rate reduction, which is a concession to help offset the cost to the buyer. Grubbs said she has discussed using this strategy with clients in her real estate practice.
“For a seller, it costs less to buy out someone’s mortgage than it does to lower the price,” Grubbs said.
Homebuyers may want to consider a 2-1 repayment, a mortgage that provides a low interest rate for the first year, a slightly higher rate in the second year, and a full rate for subsequent years.
According to Bachaud, sometimes a 2-1 purchase can also be financed by the seller.
Talking to a loan officer can help you decide on the best decision for your situation, Bachaud said.
Factor in the unknowns
How well any home buying strategy will do over the long term depends on one big unknown: how the Federal Reserve handles interest rates in the future.
The latest central bank projections demand it two more rate hikes this year.
While today’s rates seem high, Elliott said she often reminds people that homebuyers in the 1980s would have been happy to have access to 6% mortgage rates.