Increasing use of up-front ‘discount points’ for lowering interest rates targeted in bureau report

Higher mortgage rates have led borrowers to pay “discount points” which have nearly doubled over the last two years, the federal consumer financial protection agency said Friday.

The agency added that it is monitoring the development and the potential risks to consumers.

In a release, the Consumer Financial Protection Bureau (CFPB) said the discount points — a one-time fee paid at closing to a lender in exchange for a lower interest rate — 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, the agency said.

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 bureau said its report used quarterly Home Mortgage Disclosure Act (HMDA) data from 2019 through the first three quarters of 2023. It 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.

According to the bureau, that indicates lenders may be using discount points to lower borrowers’ monthly payments and debt-to-income ratio, a measurement 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.

CFPB Finds Americans are Paying Upfront Fees Seeking to Lower Interest Rates on Mortgages