A new report from the Consumer Financial Protection Bureau (CFPB) found that as overall interest rates rose, more borrowers paid “discount points” upfront.
The report stated that the percentage of homebuyers paying discount points roughly doubled from 2021 to 2023, with the increase even greater among borrowers with lower credit scores. The CFPB is monitoring these increases and potential risks to consumers.
“Higher interest rates on mortgages have led borrowers to pay upfront fees to lower their interest payments,” CFPB Director Rohit Chopra said. “The heavy use of ‘discount points’ suggests that many borrowers are uncertain about their ability to refinance in the future.”
Discount points are 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. However, 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.
The report found that borrowers with lower credit scores were more likely to pay for discount points. Further, discount points were especially prevalent among Federal Housing Administration (FHA) borrowers with low credit scores. This likely means that lenders were using discount points to lower borrowers’ monthly payments and debt-to-income ratio, which helps people qualify for mortgages. Nearly 77 percent of FHA borrowers with credit scores below 640 purchased discount points, while 65 percent of all FHA borrowers paid discount points.
Also, the CFPB study revealed that discount points were most common among borrowers with cash-out refinances, with 87 percent of those borrowers in September 2023 paying discount points, up from 61 percent in January 2021. Nearly 61 percent of borrowers with home purchase loans and 58 percent of borrowers with non-cash-out refinance loans also paid discount points in September 2023, up from 31 and 36 percent in 2021, respectively.
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 report used quarterly Home Mortgage Disclosure Act (HMDA) data from 2019 through the first three quarters of 2023.