A recent analysis of data from the Home Mortgage Disclosure Act (HMDA) by Zillow Home Loans has found that nearly 45% of conventional primary home borrowers opted to purchase mortgage points in 2022 as a means to reduce their monthly payment.
The historically low pandemic-era interest rates of 2019-2021 saw far fewer buyers opting for points—29.6% in 2021, 28.4% in 2020, and 27.3% in 2019. And borrowers who opted for a cash-out refinance loan (on a conventional loan for a primary home) bought even more points in 2022—57.8% of these borrowers purchased points (compared to 48.4% in 2021, 44.2% in 2020, and 41.3 in 2019).
"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."
While buying points is more common now, it's most often used by borrowers who make less than their area's median income (between 30% and 50% of their area's median income) and are most concerned about monthly payments. Those who make less than 30% of an area's median income purchased the most points overall for homes in the bottom price tier.
Regardless of income level, borrowers were more likely to purchase points for homes in the top and middle price tiers, than for homes in the bottom price tier found Zillow. Reducing interest rates doesn't come for free, and buyers need to determine if paying up front to reduce the fee in favor of lower monthly payments is worth it. Generally, mortgage applicants need to pay 1% of the loan amount to cut the interest rate by 0.25%. A break-even calculator can help buyers determine if paying more now to buy points could save them money in the long run.
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. These challenges should not be confused with a lack of desire to purchase a home. For those who can afford to buy now, they should find less competition than the buying frenzy of years past. This means buyers are more likely to get into the right house, as opposed to the only house they can find, which is important considering the majority of homeowners are in their home for about 15 years.
And will the trend of purchasing mortgage points continue? Rates remain above the 6% mark and are climbing, as the 30-year fixed-rate mortgage (FRM) rose for the second straight week, as Freddie Mac’s Primary Mortgage Market Survey (PMMS) reported it averaged 6.43%, up from last week when it averaged 6.39%. A year ago at this time, the 30-year FRM averaged 5.10%. This marked the second consecutive week of rate rises, after a five-week run of fixed-rates falling.
Despite the rise in rates, mortgage application volume rose week-over-week, as the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 21 found mortgage applications increased an overall 3.7% from a week earlier.
“Financial markets are anticipating that the Federal Reserve will raise short-term rates at its next meeting, which has pushed Treasury yields and mortgages rates higher in recent weeks,” said MBA President and CEO Robert D. Broeksmit, CMB. “Despite the higher rates, purchase applications increased last week, but remained below year-ago levels. High home prices and low supply continue to be obstacles for households wanting to buy a home this spring.”