On April 5, the CFPB issued a report indicating that more home loan borrowers paid discount points upfront as overall interest rates rose. The percentage of homebuyers paying discount points roughly doubled from 2021 to 2023, according to the bureau, which noted that the increase was even greater among borrowers with lower credit scores. CFPB says it is monitoring increases in borrowers paying discount points as financial tradeoffs vary and such payments may create risks for consumers.
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 1% of the loan amount, but discount points have no fixed value in terms of the change in interest rate. The CFPB report used Home Mortgage Disclosure Act data from the first quarter of 2019 through the first three quarters of 2023. CFPB claims that borrowers with lower credit scores were more likely to pay discount points, and that discount points were especially prevalent among Federal Housing Administration borrowers with low credit scores. According to the bureau, this indicates that lenders may be using discount points to lower borrowers’ monthly payments and debt-to-income ratio, which is one of the measurements lenders use to assess a borrower’s ability to repay to qualify for a mortgage.
According to the report, 87% of borrowers with cash-out refinances paid discount points (up from 61% in 2021), and borrowers with cash-out refinance loans paid twice the number of discount points compared to other borrowers (with a median of 2.1 points per loan). Additionally, almost 77% of FHA borrowers with a credit score below 640 paid discount points compared to 65% of all FHA borrowers.
