Mortgage borrowers often have a choice to pay more up front in points to get an interest rate reduction or save money and accept a higher rate.
It’s a choice that more buyers are considering, particularly jumbo borrowers—those who borrow more than $510,400 in most locales.
Borrowers should carefully weigh the decision when choosing to pay points to lower the interest rate. They will need to identify their break-even point between two mortgages with different rates and points.
Online mortgage-points calculators, such as mtgprofessor.com, could be used to help.
Determine the Break-Even Point
Many financial experts say paying discount points makes a lot of sense if the break-even date comes within two years. A break-even point of three and four years is also likely worth considering.
High balance and jumbo borrowers have been paying more in points than they did prior to the pandemic, according to an analysis by Optimal Blue, a mortgage technology and data company.
“Jumbo borrowers are paying more discount points to lock in a historically low rate at the lowest available level,” said Rick Allen, vice president of business transformation for Optimal Blue, to The Wall Street Journal.
Reportedly, more mortgage lenders are also offering borrowers an unusually large per-point reduction on the rate.
For example, the Wall Street Journal reported on a borrower who was able to get a 2.75% rate on a loan for $584,000 in mid-August. The borrower paid half a point—0.5% of the total loan amount—or $2,920. Their next choice for a loan without paying points was 3.375%.
Points Don’t Always Mean Rate Reduction
Not all loans offer these types of rate reductions with points. Many loans offer the traditional one point per 0.25% rate reduction.
United Wholesale Mortgage recently made headlines when it introduced a 30-year fixed-rate loan that can be paid down with points to a 1.99% rate. Without points, that loan would have a rate of about 2.5%, although that can vary among borrowers.
Better.com, an online lender, reports that borrowers paying points on their loans is about 40% higher than it was between March through August of last year. He says many clients were locking in a 2%, 30-year fixed-rate mortgage in August by paying 5 points to do so. Without paying points, their rate likely would have been about 3.125% instead.