Rising interest rates may soon revive the practice of paying points to lower monthly mortgage payments, an option not as readily offered by lenders in recent years.
A weekly survey of lenders by the Mortgage Bankers Association on Wednesday reported a 15 percent drop in demand from a year ago for loans to buy homes and mortgage refinancing.
At the same time, another survey by HSH Associates, which tracks the mortgage industry, found that more lenders are quoting points along with mortgage rates. As recently as this summer, lenders surveyed by HSH were quoting mortgage rates at zero points because there was no need to pay points when mortgage rates were low.
In some cases, lowering the mortgage rate by paying points can actually help a borrower qualify for a home loan. That is because much of the lender's qualification process hinges on determining a borrower's ability to make the monthly loan payments.
Points are typically a fee equal to 1 percent of the mortgage loan. By paying this fee, home buyers lower mortgage rates and monthly home-loan payments.
Rates for the most common mortgage, the 30-year home loan, have risen above 6 percent in recent weeks, increasing borrowing costs for home buyers. Thirty-year mortgage rates have been below that psychologically important level for much of the year, but they climbed during the latest in a series of Federal Reserve interest rate increases and heightened concerns about inflation in financial markets.
According to Keith Gumbinger of HSH Associates, each point paid can bring down a mortgage interest rate by one-eighth of a percentage point to one-quarter of a percentage point. Typically, he said, lenders do not quote mortgage rates with more than three points.
"As rates creep higher, we're likely to see more [loan] prices being put out into the marketplace which feature points as part of the equation," said Gumbinger, adding that "points are coming back into the lending lexicon."
James B. Nutter Jr., president of James B. Nutter & Co., a Kansas City, Mo., mortgage lender, said the practice of selling points typically gains popularity as rates rise. "It happens like this whenever it gets slow and anytime builders overbuild," he said.
The pace of home sales has slowed in recent months, which may prompt some sellers to lower prices. In the future, sellers may even offer to pay points for a buyer to ensure a property gets sold.
"I would definitely expect more of it. Buyers may not pay for it. The seller or builder may pay for it to get a house sold," Gumbinger said.
While 30-year mortgage rates are at 6.2 percent to 6.3 percent, relatively low by historic standards, consumers willing to pay points can bring down that rate to less than 6 percent.
Meanwhile, some lenders may not want their borrowers to deplete their savings by paying down points because this could make them more of a risk, said Douglas Duncan, chief economist at the Mortgage Bankers Association. For lenders, the main issues are whether the borrower can make monthly mortgage payments and how the payment of the points affects the borrower's overall finances, he said.
"A lot depends on what the goals are for the borrower. Will they live in the house more than three years?" said Deborah McNaughton, president of Professional Credit Counselors of Brea, Calif. "If they hang on to the home, they should go for the lower rate and pay points. The difference between the cost of the point will be paid out in the first three years."