Mortgage Rate Forecast: Should I pay points to lower my mortgage payment?

Rates are much higher than anyone would like, and we are frequently being asked questions like:

“What is the best way to lower my mortgage payment?”

“Should I consider paying points to lower my payment?”

Although ‘high’ is a relative term, as of the date of this article (July 2023), rates are around 7% for conventional loans and 6.5% for FHA/VA loans (APR 7.110% and 7.264%).

If you’re not familiar with the idea of paying points, the idea is that you pay an extra one-time fee at the closing of your purchase to permanently lower your interest rate for the term of the loan (all 30 years, if the loan is the most common 30-year fixed rate mortgage). The amount that your interest rate (and corresponding principal and interest payment) is reduced by, as well as the fee amount you will have to pay to get that reduced rate, varies between companies.

A general rule-of-thumb is that for every 1 point that you pay (1 point = 1% of the loan amount paid as a fee), you will lower your interest rate by 0.25%.

Lately (from April – July of 2023), this rule is not proving to be accurate, as there are many cases in which you can lower your rate by 0.5% or even 0.75% by paying 1 point.

So, the question becomes, How much do I need to lower my rate for paying points to be ‘worth it’?

The answer depends on how long you will hold the mortgage loan before you either refinance, pay off the loan, or sell the property.

Mortgage Rate Forecast for 2023 and 2024

Most buyers don’t know if they will refinance their loan in the future (with a New Jersey mortgage broker) and this is how many borrowers are tricked into paying for points even though it’s not in their best financial interest.

If you’re planning to refinance your loan in the near future (less than 2 years), it is HIGHLY UNLIKELY that paying points is a smart decision.

The top economists at Fannie Mae, the Mortgage Bankers Association, and the National Association of Realtors ALL BELIEVE that mortgage rates will decrease in the next 12 months, which makes refinancing your loan obtained in 2023 (during 2024) likely.

Here are a few links to the predictions:

Fannie Mae – Rates at 6.3% by October 2023 and 5.8% average in 2024

Freddie Mac – Rate to drop to 6.2% by October 2023

Freddie Mac – Rates to remain above 6% through the end of 2023 (read the ‘General economy, rates, inflation section)

Mortgage Bankers Association – Rates at 5.5% by October 2023 and 5.0% average in 2024

How much money am I wasting if I pay points for my mortgage?

The answer to this question depends on how long you hold your loan before refinancing your mortgage New Jersey, how much you paid in points, and how much you were able to reduce your rate by paying points.

Let’s review a common scenario:

Market Rate:                           7%

Lower Rate with Points:          6.5%

Points Cost:                             $6,000

Purchase Price:                       $600,000

Loan Amount:                         $570,000

The Principal and Interest payment on the 7% rate is $3,792, and the Principal and Interest payment on the 6.5% rate is $3,603. Let’s compare how much money is wasted in points by comparing how long the loan is held before refinancing to a lower rate:

This chart shows that the longer you hold the loan, the less money you are wasting on paying points. If you refinance with an independent mortgage broker near me within 12 – 18 months of your original closing date, you are wasting $2,598 - $3,732, and we believe that this is the most likely timeline for a refinance.

If you are evaluating mortgage options and want to work with one of the best mortgage brokers in NJ that you can trust (with the biggest purchase of your life), please give Brightwire a call today!