According to Black Knight’s newest Mortgage Monitor report, there’s a growing trend of homebuyers paying points upfront to permanently reduce their mortgage interest rates in an effort to stem ongoing affordability woes.
Early 2023 data from Black Knight revealed some signals of recovery in homebuying activity, with purchase loan locks up by 64% between the first and last week of January. That’s the largest such jump in the past five years, with buyers likely motivated in part by declining interest rates and receding home prices.
But chalking the gain up entirely to these factors would be too much of a stretch, said Ben Graboske, Black Knight’s president of data and analytics.
“On the surface, it may seem the market has been stirred by a full-point decline in interest rates and home prices coming off their peaks – but it’s not that simple. Yes, according to the Black Knight Home Price Index, December did see home values post their sixth consecutive monthly decline, and prices at the national level are now 5.3% off their June 2022 peaks,” he said.
But affordability challenges still present a “stranglehold” on much of the market, as Graboske put it. The monthly mortgage payment on an average-priced home remains 40% higher now than it was at the same time last year, Graboske noted. And while purchase locks saw a modest rebound over the course of January, they were still approximately 13% below the pre-pandemic levels of 2018 and 2019 in the last full week of January.
Coinciding with rates coming down, borrowers are being proactive, Graboske said.
“What we’ve seen in response to this challenging environment is greater reliance on permanent rate buydowns by borrowers,” he explained. “There have been murmurs and stories around temporary buydowns, but those remain a relatively small share of originations in general.”
Three percent of purchase locks tracked by the Black Knight Optimal Blue platform included a temporary buydown, but 57% of purchase locks included at least a half-point paid as part of a permanent buydown. Forty-four percent included at least a full-point buydown while nearly a quarter of borrowers paid down their rates by two points or more.
These percentages may seem high, but they’re not without recent precedent. In September and October of last year, when rates were spiking, as many as 71% of borrowers paid points to reduce their rates. Forty-three percent prepaid at least two points.
Purchase borrowers, who made up 81% of new rate locks during the week ending Jan. 21, paid an average of 1.16 points to push down their rates. Cash-out refinance borrowers averaged 2.06 points paid.