WASHINGTON–The number of mortgage borrowers paying “discount points” upfront has nearly doubled as rates rose from 2021-23 as they sought to lower interest payments, but the benefits are questionable, according to the CFPB, which said it is investigating.
In a new report examining discount points, the Bureau said the percentage of homebuyers paying discount points roughly doubled from over those three years, and the increase was even greater among borrowers with lower credit scores.
“While discount points may provide advantages to some borrowers, the financial tradeoffs are complex,” the CFPB said, adding it is “monitoring these increases and potential risks to consumers.”
‘No Fixed Value’
The CFPB defined discount points as a one-time fee paid at closing to a lender in exchange for a lower interest rate.
“Paying one discount point is the equivalent of paying a fee of one percent of the loan amount, but discount points have no fixed value in terms of the change in interest rate,” the CFPB said. “Most borrowers only benefit from discount points if they keep their mortgage long enough that the cumulative monthly savings from the reduced interest rate outweigh the upfront costs.”
Report Based on HMDA Data
The CFPB report is based on Home Mortgage Disclosure Act (HMDA) data from 2019 through the first three quarters of 2023.
“The report found that borrowers with lower credit scores were more likely to pay discount points, and that discount points were especially prevalent among Federal Housing Administration (FHA) borrowers with low credit scores,” the CFPB said. “This indicates that lenders may be using discount points to lower borrowers’ monthly payments and debt-to-income ratio, which is one of the measurements lenders use to assess a borrower’s ability to repay in order to qualify for a mortgage. Nearly 77% of FHA borrowers with credit scores below 640 purchased discount points, while 65% of all FHA borrowers paid discount points.”
Additional Findings
According to the report:
- Discount points were most common among borrowers with cash-out refinances, with 87% of those borrowers in September 2023 paying discount points, up from 61% in January 2021
- Nearly 61% of borrowers with home purchase loans and 58% of borrowers with non-cash-out refinance loans also paid discount points in September 2023, up from 31% and 36% in 2021, respectively
- Borrowers with cash-out refinances also paid a greater number of discount points. The median amount of discount points in the 2023 quarterly data was 2.1 points for cash-out refinance loans, 1.1 points for non-cash-out refinances, and 1.0 point for home purchase loans, the CFPB said.