The Housing Headline
Some home buyers are losing their choice to pay discount points.
The News Behind The Housing Headline
Discount points are upfront mortgage fees. Home buyers pay them to access lower interest rates than a lender would otherwise quote.
Until the onset of COVID-19, discount points were optional. They were a customizable loan feature to help home buyers design the best possible mortgage for their finances.
For some buyers today, though, discount points are mandatory.
The economic uncertainty created by COVID-19 is causing mortgage rates to change faster than they’ve ever changed in history. Mortgage companies worry that a semi-sustained drop in rates is coming. If that were to happen, every loan made today would get refinanced, and mortgage holders would never get to collect on their interest payments.
So, lenders are making discount points not optional. It’s their best way to guarantee that fees are earned and collected.
Why This Housing News Matters To You
When you buy a house and use a mortgage, you get to put the loan together any way you want.
- You can choose how long until you pay the loan back
- You can choose whether the interest rates stays fixed
- You can choose how much money you want to borrow
And, until COVID-19, you could choose whether your mortgage loan included discount points for access to a lower interest rate.
Now, depending on your loan, you might not get that choice. Discount points could be mandatory for you.
Not that it’s a terrible thing.
Discount points aren’t necessarily bad. They’re terrific for buyers with tight monthly budgets and decent household savings; and, for buyers who negotiate for closing cost credits in the sales contracts.
Each discount point costs 1 percent of the loan size and generally lowers an interest rate by a quarter-percentage point.
In a real-world example, one discount point on a $300,000 mortgage would cost $3,000 and lower your mortgage rate from, say, 3.75 percent to 3.50 percent.
There are a lot of home buyers for whom that’s a good deal. Just in today’s market, they might not have the choice.
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When your lender says, “you have to act quickly” is not some high-pressure sales tactic meant to make you feel fear. It’s the truth.