Nearly 50% of Home Buyers in the US Use This Simple Strategy To Lower Their Mortgage Rate and Payments

Nearly half of all home buyers in the United States are buying points as part of an effort to lower their mortgage rates, and consequently their monthly payments, amid the country's housing affordability crisis.

At least 49% of home buyers chose to buy points in 2023 to reduce their mortgage rate, according to the most recent data from real estate firm Zillow. In comparison, only 27% of people bought points in 2019.

Buying points were more common among homebuyers who made less than their area's median income. These households typically make between 30% and 50% of their area's median income, the Zillow report noted.

"Buying points can be a great option to improve monthly affordability - there are many different mortgage products, including buying points and the 2/1 buydown buyers can explore," Erika Kerry, loan officer at Zillow Home Loans, said in a statement.

What Is Buying Points?

Buying points, often referred to as "discount points," is a strategy used by borrowers to help reduce the interest rate on their home loan. Buyers typically pay extra to their lender at closing to reduce their mortgage rates, which later results in a smaller monthly payment. Additionally, the cost of mortgage points could also be tax-deductible as mortgage interest.

Typically, one point costs 1% of the total loan amount. For instance, on a mortgage worth $450,000, one point would cost $4,500.

Each point purchased can help reduce the interest rate by around 0.25%. For example, buying one point could lower a buyer's mortgage rate from 6.0% to 5.75%. However, this can vary by lender, according to Bankrate.

What To Consider Before Buying Points?

Homeowners are generally advised to buy points only if they plan to stay at a property long-term. Breaking even on the additional payment to save on monthly mortgage payments can take anywhere between five to seven years, as reported by CNBC.

For some buyers, putting in a larger downpayment could be better than buying points. Putting a larger down can lower monthly payments and may help buyers avoid private mortgage insurance (PMI), which equals over $100 monthly on a $300,000 loan.