Borrowers Utilizing Rate Buydowns Trends Upward

The Data & Analytics division of Black Knight, Inc. has released its latest Mortgage Monitor Report, showing both home prices and interest rates have come down from 2022 peaks – boosting purchase lending rate lock activity. Meanwhile, affordability remains a significant challenge in the market. As Black Knight Data & Analytics President Ben Graboske explains, one manifestation of this affordability challenge is the increasing trend of borrowers buying down their first lien interest rates by paying points up front.

"Based on our Optimal Blue rate lock data, we can see definite signs of a January uptick in purchase lending on lower rates and somewhat lower home prices," said Black Knight's President of Data & Analytics Ben Graboske. "Indeed, locks on purchase mortgages soared 64% from the first through the fourth week in January. On the surface, it may seem the market has been stirred by a full point decline in interest rates and home prices coming off their peaks – but it's not that simple."

Key Findings:

• While daily Optimal Blue rate lock data showed modest signs of an early-January rebound in purchase locks, refinance lending remains challenged despite a full percentage point rate decline since the October 2022 peak
• Purchase rate locks rose by 64% from the first to the fourth week of January, the sharpest such rise in the past 5 years; still, by the last week of the month, there were 13% fewer January purchase loans locked than 2018/2019 pre-pandemic levels
• In the third week of January, 57% of borrowers locking in rates paid at least a half-point as part of a permanent buydown, 44% paid at least a full point, and nearly a quarter bought down their rates with 2 points or more
• Such buydowns peaked in September-October 2022, when as many as 7 in 10 (71%) borrowers paid points on permanent buydowns, and 4 of 10 (43%) paid 2 points or more

"According to the Black Knight Home Price Index, December did see home values post their sixth consecutive monthly decline, and prices at the national level are now 5.3% off their June 2022 peaks," said Graboske. "But affordability still has a stranglehold on much of the market, with the monthly mortgage payment on the average-priced home more than 40% higher than it was this time last year. It's also important to keep January's surge in purchase activity in perspective. While up, purchase locks were still running roughly 13% below pre-pandemic levels for the last full week of the month."

Overall, borrowers paid an average of 1.25 points, down from a peak of 2.03 points last fall, at an average cost of $4,300 per borrower for the week ending Jan. 21, 2023, vs. $6,900 for the week ending Oct. 1, 2022. For context, prior to the pandemic and resulting housing market boom, average points paid in 2018-2020 were closer to 0.5, with a corresponding cost of around $1,500. Purchase borrowers – who paid an average of 1.16 points in the week ending Jan. 21, 2023 – now make up 81% of new rate locks; cash-out refi borrowers (~14% share) paid nearly twice that, for an average of 2.06 points.

"What we've seen in response to this challenging environment is greater reliance on permanent rate buydowns by borrowers. There have been murmurs and stories around temporary buydowns, but those remain a relatively small share of originations in general. In the third week of January, 3% of purchase loans locked on Black Knight's Optimal Blue platform included a temporary buydown. Just over 2% involved 2-year temporary buydowns.

In contrast, the third week of January, 57% of all borrowers who locked in rates paid at least a half point, 44% paid at least a full point, and nearly a quarter lowered their rates with buydowns of two points or more. If that seems high, consider that back in September and October of last year, as many as 71% borrowers paid points with 43% paying two or more points. Prior to the pandemic-era housing boom, borrowers in 2018-2020 paid 0.5 points with a corresponding cost of around $1,500 – as compared to $4,300 today and as high as $6,900 last fall. Purchase borrowers, who now make up 81% of new rate locks, paid an average of 1.16 points. For those looking to pull cash out of their homes, the cost was nearly twice that, with an average 2.06 points paid."

Additionally, at least 3% of purchase borrowers received temporary buydowns, with 1/0s, 2/1s and 3/2/1s the most prominent market offerings, setting up some degree of potential for payment shocks down the road

To read the full report, including more data, charts and methodology, click here.