Short term solution to high rates.

With the average 30-year, fixed-rate mortgage hitting a peak in August and September, homeowners face added affordability challenges, as reported by Freddie Mac. In response, some borrowers are turning to mortgage buydown points as a strategy to temporarily lower monthly payments, according to CoreLogic Economist Archana Pradhan. Mortgage buydown points allow homeowners to enjoy reduced monthly payments during the initial years of homeownership. For instance, on a $500,000 loan at an 8% interest rate, monthly payments would normally be around $3,670. But with a short-term rate drop to 6%, those payments can decrease to about $3,000. Notably, while mortgage buydown points offer short-term savings, interest rates incrementally increase over time.

Historically, buydown points were more prevalent prior to the Great Recession, Pradhan said. She said lenders often provided them to borrowers who might not have qualified for loans without a complete ability-to-pay verification. However, post the 2010 Dodd-Frank Act, today's mortgages have become more reliable and less risky, ensuring borrowers aren't solely qualified based on initial terms. Mortgage buydown points' popularity has surged recently as buydown activities increased notably as the average 30-year, fixed-rate mortgage surpassed the 6% mark, peaking in Dec. 2022. But with continued high interest rates, buydown point utilization has slightly dipped. On average, borrowers choosing buydown points face interest rates 17 basis points higher than those who don't, which according to Pradhan suggests some buyers are prepared to pay more upfront to ensure reduced initial monthly payments.

Source: National Mortgage Professional