In normal times, mortgage borrowers have to make a choice: Pay more up front, in the form of a point, and enjoy a roughly 0.25% interest rate reduction. Or save money up front and accept a slightly higher rate.
But when Joel Richardson, the Austin branch manager of mortgage banker PrimeLending, looked for a $1.6 million jumbo refinance loan for a client in May, the choice felt like it had been made by the lender.
Mr. Richardson could offer his client a rate of 4.25% with no points. But if the client paid one discount point—$16,000 in the case of this loan—“the difference in rate was staggering,” Mr. Richardson said. That single point bought a rate of 3.125%. That is four and a quarter times the traditional rate reduction, and meant that one point knocked over $1,000 off the monthly loan payment.
“I’ve been doing this for 21 years, and this is the first time I’ve seen a discount points spread that wide,” said Mr. Richardson. As for his client, they paid the point, he said.
More on Jumbo Mortgages…
Since Covid hit, high-balance and jumbo borrowers—those borrowing over $510,400—have been paying more in points than they did before the crisis, and more than conforming loan borrowers have paid since the pandemic hit, according to an analysis by Optimal Blue, a mortgage technology and data company in Plano, Texas. One reason is a low-rate frenzy.
“Jumbo borrowers are paying more discount points to lock in a historically low rate at the lowest available level,” said Rick Allen, vice president of business transformation for Optimal Blue. Another reason, several brokers and lenders said, is that some mortgage lenders are offering borrowers an unusually large per-point reduction on the rate, like Mr. Richardson’s client encountered.
Sean Bloch, owner of Block Financial Resources in New York, said he locked a loan for $584,000 in mid-August at 2.75% for which the borrower had to pay half a point—0.5% of the total loan amount—which came to $2,920. The next-best choice was a no-point loan at 3.375%.
“It’s almost as though you have to pay points for the best scenario because it’s just a much better deal,” Mr. Bloch said.
Lenders—and the investors behind their products—are likely incentivizing points more than usual because of the confusion and doubt in the mortgage industry, said Lou Barnes, a senior loan officer at Premier Mortgage Group in Boulder, Colo.
“It’s almost as though you have to pay points for the best scenario because it’s just a much better deal.”
Typically, lenders assume most borrowers will hold on to a 30-year fixed mortgage for about six years. At the six-year point, using a roughly one point per 0.25% rate reduction, the lender calculates that they make the same amount of money whether the borrower paid points or not. After six years, the borrower will recapture the money they spent on points and begin to pay less interest than they would have at a higher interest rate with zero points.
Amid historic uncertainty, lenders can’t predict how long borrowers will keep their loans. Thus, many are hedging their bets by collecting interest up front, said Mr. Barnes.
Not all loans today offer a more generous-than-usual rate reduction; there are still many loans in the marketplace offering the traditional one point per 0.25% rate reduction, and ones that offer a little less. Regardless, some are selling like hot cakes as consumers eagerly grab low rates.
Mat Ishbia, president and chief executive of United Wholesale Mortgage in Pontiac, Mich., the second-largest lender in the country (after Quicken Loans), introduced a 30-year fixed loan with rates that can be paid down to 1.99%—low enough, Mr. Ishbia hopes, to circumvent refinancing no matter where rates go. With no points, the loan generally has a 2.5% rate, though it varies depending on the day and the borrower, Mr. Ishbia said.
At online lender Better.com, the number of borrowers who are paying points on their loans today is 40% higher than it was between March through August of last year, said Joseph Mileo, a capital markets associate. Between August 18 and August 25, he said, “we had 35 people lock a 2%, 30-year fixed. And they paid five points for that.” No-point loans were also offered at 3.125%, meaning the points offer yielded a reduction of 0.225% in interest per point paid, slightly below the standard 0.25% discount-per-point.
That behavior makes some mortgage experts very unhappy. Pranav Sahai, chief executive of broker Jumbo Loan Experts in New York, is one of them.
“Buying points should be made illegal as it disproportionately hits poor or uneducated consumers,” said Mr. Sahai, who said that not one of his over 1,000 customers has ever paid points. Mr. Sahai objects to waiting six years to see the first dime of return on the investment in points, a time-frame during which the average borrower either refinances or moves. Most borrowers would make more money and have more flexibility by investing their cash in an S&P Index Fund, Mr. Sahai said.
Mr. Barnes said some of the recent high-balance and jumbo offers allow borrowers to break even in a much shorter time period, reducing their risk.
“If I find it’s in the three- to four-year range, then I explore with the client the shorter recapture period, despite my lifelong disagreement with paying points,” said Mr. Barnes.
What To Know Before Paying a Lower Rate…
1. Use a mortgage-points calculator that includes an investment-return calculation, such as those available on www.mtgprofessor.com. These tools identify the break-even point between two mortgages with different rates and points, and include returns on the investment of the money a borrower would have spent on points.
2. Several mortgage experts agreed: Paying discount points makes a lot of sense if the break-even date comes within two years. Between three and four years, it is worth considering. At five or six years, it is time to consider other investments, talk to the accountant and think twice. Anything over six years is viewed by many mortgage experts—though not all—as too long.
3. Discount points, unlike other mortgage-closing costs, are generally tax deductible. Talk to your accountant about the deduction and how it differs for purchase and refinance.