What does paying discounts points mean? Paying a discount point means you are prepaying your interest up front on your mortgage. You are basically paying to lower your interest rate. On average, paying a point or 1% of your loan amount, lowers your interest rate by around 0.25%. Also, it could take over 6 or 7 years to recoup your expense of paying that point doing math on your monthly savings versus your upfront expense that you paid. But let’s think about the current market we are in.
Many analysts are forecasting interest rates to slowly decline over the next few quarters. Fannie Mae forecasts the high 5s on a 30-year fixed mortgage by Q2 of next year. The Mortgage Bankers Association and the National Association of Realtors both forecast 30-year fixed mortgage rates around 5.8% sometime in Q4 of 2023. Mortgage interest rates share a relationship with inflation and as inflation drops, interest rates follow. When paying points to lower your interest rate, you are basically betting against interest rates declining and again in this market it seems like it isn’t the best bet.
However, there can be a scenario where paying points might make sense. For example, if you were prequalified months ago when rates were around 6% and now you find a home and your updated rate is in the 7% range, this could affect your eligibility to qualify since your debt-to-income ratio was calculated using a monthly payment that was generated with a rate in the 6% range. In this case you might be able to buy your rate down by purchasing a point or points and getting your rate from the 7s back down to the 6s which will increase your purchasing power.
It is important to work closely with trusted mortgage professionals who can help guide you in the right direction. They will help you make the most educated decisions and give you a full understanding of all of your options to help weigh out the pros and cons of paying discount points.
By: Jon Iacono
