Borrowers' Uncertain Benefits: Paying 'Discount Points' for Lower Rates

Only some borrowers benefit from "points" paid on mortgages

A new report suggests most homebuyers are paying "discount points" up front on mortgage loans in exchange for a lower interest rate. The Consumer Financial Protection Bureau (CFPB), which issued the report, says these points may only benefit some homeowners.

“Higher interest rates on mortgages have led borrowers to pay upfront fees to lower their interest payments,” said CFPB Director Rohit Chopra. “The heavy use of ‘discount points’ suggests that many borrowers are uncertain about their ability to refinance in the future.”

According to the report:

Nearly 61 percent of borrowers with home purchase loans and 58 percent of borrowers with non-cash-out refinance loans also paid discount points in September 2023, up from 31 and 36 percent in 2021, respectively.

While points paid up front could lead to benefits in terms of a lower interest rate, the CFPB says the homebuyer would need to hold the property long enough to recoup the total value paid in points. It's possible the buyer could refinance at a lower rate before the points value would be recouped.

Depending on the size of the loan, the interest rate, and the discount points purchased, it could take 5-10 years to recoup the full value of the upfront cost.

Photo byRowan HeuvelonUnsplash