Even with the expectation of an interest-rates thaw in the year ahead, home-lending affordability remains a significant challenge for both borrowers and lenders. One strategy that provides relief is “discount points,” an upfront fee that allows borrowers to permanently buy down the loan’s interest rate. Not surprisingly, the use of discount points correlates with the direction of rates. As rates rose in Q4, borrowers moved swiftly to engage them, according to Curinos’ LendersBenchmark (see chart).
From the borrower’s perspective, the economics of paying points is a delicate balance between whether they can be amortized before refinancing becomes an economically attractive option. The calculation also needs to weigh the borrower’s initial investment, their new relative rate position and any closing costs associated with a future refinance. But even with these considerations, the data support a willingness by borrowers to subsidize adverse interest rate movements to improve their payment outlook. The average buydown in February was .48%—almost half a point.
Lenders would be well advised to recognize this propensity in both their note-rate offerings and broader price positioning. The availability of appropriate rate options can help ensure that they meet borrowers’ diverse demands. And leading with a lower, discounted rate can signal that they’re anticipating a borrower’s preference for discount points, especially in a rising rate environment.
Borrowers tend to exhibit a preference for discount points, especially in a rising rate environment.
CF30 Average Rate vs. Average Discount Points Paid | Purchase - Locks
Source: Curinos LendersBenchmark
