What is the Point to Paying Points?
A big shout out to fellow author, Arnie Aurellano at the Scotsman Guide for first reporting on the Freddie Mac data that came out in January focusing on paying points in order to buy down the rate on your mortgage.
A quick “Mortgage 101” reminder of what the concept “paying points” is all about. It represents a percentage (1.0% of the loan size = 1 point) cost to get a lower rate.
Probably best to show a quick example here: Let’s say you take out a mortgage for $500,000 and the base rate is 7.00% (the ‘base rate’ is where it doesn’t cost you anything to buy the rate down). A lender says that it cost .5% to buy the rate down to 6.75%. This means that is costs “half a point” (in this case, $2,500) to have a rate of 6.75% instead of 7.00%
Unsurprisingly so, Arnie pointed out that more borrowers turned to discount points as a way offset rising rates in 2023 versus previous years, but new data from Freddie Mac has revealed that doing so just might not be worth it.
Freddie Mac recently performed a study on conforming-loan borrowers with credit scores of at least 740 and a loan-to-value (LTV) ratio from 75 to 80% who took out a mortgage for a home purchase or refi of a single-family home.
Even with so many folks taking advantage of points, though, Freddie has found that the interest rate differential between those who do and those who don’t comes out to be very small. Through November 2023, the average effective rate on purchase mortgages for borrowers who didn’t buy discount points was 6.69%. For borrowers who did pay for points, the average effective rate on purchase mortgages was 6.86%. Your eyes did NOT deceive you. People who didn’t pay points actually got a lower rate than people who did.
How can this be? Shouldn’t it be simply math? It should be. But unfortunately its not the case.
The finding that borrowers who opted against points had a lower effective rate than those who did is surprising, and Freddie warns that it cannot conclude a negative relationship between discount points and interest rates because its study “[did] not control completely for borrower observed and unobserved attributes.”
Here's what I think I think. I think that borrowers are putting too much blind trust into untrustworthy mortgage loan officers and those Loan Officers are taking advantage of a borrower’s ego instead of slowing down to show them the math behind buying rates down.
Think about the last conversation you had about mortgage rates at the coffee machine in the office or out on the golf course. Your foursome each shared the rate they had as you each approached the first tee box. None of you shared how much you paid to get that rate. A loan officer that takes advantage of that is no more trustworthy than a used car salesman trying to sell you a lemon while their fingers are crossed behind their back telling you it’s a quality vehicle.
I get legitimately angry thinking about these scenarios. I live in ‘Numberville’ each and every day. You don’t. By the time your mortgage wraps up, you’ve seen Loan Estimates, Closing Disclosures, Settlement Statements, all with crazy amounts of numbers on it. You are signing over 80 pages of loan documents. At some point, you have to trust the team that you hired to do this job for you.
If you’ve been a client of the Ryder Mortgage Group, you know that not all lenders are treated equally. Some lenders are the “Whole Foods of the Mortgage World”, and some lenders are the “Costco of the Mortgage World”.
By that I mean that the lenders that charge more for their boxes of cereal aren’t excited to point out that they charge more, so they are more likely to sweep under the carpet the points paid to access their Cheerios to get to the “regular” market price. I’ve check and Whole Foods definitely charges more for Cheerios than Winco of Costco. ????
The folks that are more like the Ryder Mortgage Group and make an effort to educate and have access to less expensive breakfast cereal tend to stop and help clients with the question of “Is the juice (the lower rate) worth the squeeze (the cost to get there).
I think lenders generally try to take advantage of ego in this high-rate environment, us brokers who point it out are able to show clients that it’s not always worth it to buy the rate down.
To conclude, I am ULTRA-curious in what the breakout is of Wholesale Mortgage Brokers like myself looks like vs. retail lenders (like the folks working directly at the lender in places like Rocket Mortgage or other online lenders where the loan officer doesn’t have a vested interest in earning their borrowers business or even a referral from them) in regards to who pays points and who doesn’t. Freddie Mac didn’t report that data, but if I was a betting man, I would place a bet that retail lenders by far are charging borrowers the points for the lower rate, but wholesale lenders and brokers like me are not needing to.
The moral of the story? Be brave and do the math even if your Loan Officer doesn’t do it for you! Always ask – “What am I being charged to access this rate?”. If you do that, you won’t be a statistic on a Freddie Mac report, but rather a well-informed borrower.
To read Arnie’s entire article, here it is: https://www.scotsmanguide.com/news/paying-for-discount-points-new-freddie-study-has-interesting-data-for-you/
* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.