Interest rates are expected to stay high for the foreseeable future, which has made mortgages more expensive.
Experts say there’s a strategy that can help homebuyers reduce monthly costs.
More homebuyers are opting for purchasing mortgage points as a way to defray higher monthly payments.

As interest rates have climbed, homebuyers have been confronted with higher borrowing costs.

That has led more home purchasers to opt for one strategy, purchasing mortgage points, as a way to defray higher monthly payments.

Mortgage points let buyers pay an upfront fee to lower the interest rate on their loans. In some cases, sellers will help to buy down rates to help ease transaction costs.

Mortgage points refer to the percentage amount of the loan. Typically, one point is worth 1% of the loan value.

If the loan value is $300,000, one point would typically cost $3,000 and lower the interest rate 0.25 percentage points.

Being able to lower that monthly payment can really help give some more wiggle room in people’s budgets and help them reach affordability.

In addition to higher upfront costs, home buyers should also weigh other factors before buying mortgage points.

Set a timeline for living in your new home

Another important consideration is your timeline for how long you plan to live in the home.

With rates and home prices high, that means closing costs are also elevated. Consequently, if you move before three to five years, you may take a bigger financial hit.


Consider other alternatives
If you have extra money when buying a home, you may instead choose to increase the size of your down payment.

This can be advantageous because it creates more equity in the home. It may also lower your monthly payments.

If that extra money is enough to bring your down payment to 20% of the home purchase price, that would eliminate the need for private mortgage insurance, which adds to monthly costs for mortgage borrowers who put down less than those sums.

However, you may see more of an effect on your monthly expenses by buying points rather than increasing your down payment

A point may cost $3,000 to $4,000, for example. But putting those sums toward a down payment likely will not make much of a difference on your monthly costs.

If you want to make sure your mortgage payment doesn’t exceed one-third of your take home income, then paying down on points could be the better option.

In some situations, a seller may offer to buy down the rate, a concession to help offset costs for buyers. 

It costs less for a seller to buy down somebody’s mortgage than it does for them to take a price reduction.

Homebuyers may want to consider pursuing a 2-1 buydown, a mortgage that provides a low interest rate for the first year, a slightly higher rate in the second year and a full rate for the following years.

Factor in the unknowns
How well any homebuying strategy fares in the long run depends on one big unknown: how the Federal Reserve will handle interest rates going forward.

Talking to a loan officer can help you decide the best decision for your situation. Call us at (480) 205 2234 to discuss further on current mortgage rates.