Zillow: More homebuyers turn to discount points to increase affordability

New HMDA data shows sharp rise in points-based purchases from prior years

In their ongoing quest for affordability, more buyers are turning to the purchase of mortgage points to pull down the interest rates on their loans, according to a new study of Home Mortgage Disclosure Act (HMDA) data by Zillow.

Mortgage points, also known as rate buydowns and discount points, are an option available to homebuyers who wish to reduce their monthly payments by “buying down” the interest rate on their loan. The points are often presented in the form of an upfront fee. Essentially, borrowers prepay interest to lower their rates and, therefore, the amount due each month for the life of the loan. The 2-1 buydown, a similar program that has also gained traction, lowers the interest rate on a loan for the first two years before reverting in the third year. Usually, the rate is two percentage points lower in the first year and one percentage point lower in the second.

Nearly 45% of conventional primary home borrowers purchased mortgage points in 2022, Zillow found. That’s far more than in recent history, considering that interest rates from 2019 to 2021 were historically low.

Only 27.3% of homebuyers opted to purchase points in 2019, while 28.4% and 29.6% of buyers in 2020 and 2021, respectively, bought mortgage points.

As in previous years, borrowers in 2022 were more likely to buy points to purchase homes in the top- and middle-price tiers, likely because decreasing your interest rate has a larger effect if the principal on your mortgage is higher.

“Buying points can be a great option to improve monthly affordability — there are many different mortgage products, including buying points and the 2-1 buydown buyers can explore,” said Erika Kerry, a loan officer at Zillow Home Loans. “These options are good examples of why it is so important to work with a knowledgeable loan officer. The loan officer should be a partner in the buying process, helping explain options so buyers can make an educated decision.”


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