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Mortgage discount points can raise upfront costs for homebuyers
With mortgage rates in the 5% to 6% range, buying down via discount points can require substantial upfront payments that increase the total cost over the life of the loan.
Mortgage rates have climbed to levels not seen since last August, driven in part by higher inflation, and financial experts warn buyers focused only on a lower monthly payment may miss the tradeoffs tied to discount points. According to the Mortgage Bankers Association, rates recently rose on the back of inflation, while the Federal Reserve Bank of St. Louis reported an average 15-year fixed rate of 5.96% on August 13 and a 30-year fixed rate average of 6.67%, both slightly below earlier in the month, per the report carried by Yahoo Finance. Even as lenders advertise deals in the mid-to-high 5% range, Yahoo Finance reports that the key catch is discount points, which can make a lower rate feel like an immediate win but can cost thousands over time. John Cooper, a certified financial planner with Greenwood Capital, told Moneywise that some buyers are mainly thinking about the home and need a mortgage as a means to get into it, rather than calculating the long-term cost. Yahoo Finance also says the practice is commonly structured as “buying down,” where upfront payments reduce the interest rate. Benjamin Clark, president of the National Association of Exclusive Buyer Agents, said first-time buyers are especially motivated by affordability and can be “blinded” by monthly savings while paying points. The article explains that each point equals 1% of the loan, so on a $400,000 mortgage, two points would cost 2%, or $8,000, paid upfront, with the lower rate intended to reduce ongoing interest costs.