Those Double-Digit Mortgage Rates from the 80s Required You to Pay Points Too!
Even
though
mortgage
rates
have
fallen
quite
a
bit
from
their
highs
seen
a
year
ago,
they
remain
quite
elevated
relative
to
much
of
the
past
decade.
Sure,
a
6%
30-year
fixed
is
better
than
an
8%
30-year
fixed,
but
it’s
still
a
far
cry
from
a
3
or
4%
30-year
fixed.
This
might
explain
why
prospective
home
buyers
haven’t
exactly
rushed
back
into
the
housing
market
in
recent
months.
And
now
we’re
being
told
this
is
as
good
as
it’s
going
to
get
for
mortgage
rates.
That
remains
to
be
seen,
but
what’s
interesting
is
I’ve
seen
quotes
down
into
the
high-4s
for
mortgage
rates
recently
too.
So
how
are
lenders
able
to
advertise
rates
that
low
if
the
Freddie
Macs
of
the
world
are
telling
us
rates
are
still
above
6%?
Well,
the
secret
is
a
little
thing
called
mortgage
discount
points.
Mortgage
Rates
Are
Lower
When
You
Pay
Points
After
mortgage
rates
surged
since
beginning
in
early
2022,
the
secondary
market
where
investors
buy
and
sell
mortgage-backed
securities
(MBS)
got
all
out
of
whack.
Basically,
uncertainty
and
volatility
surged
while
volume
plummeted.
Long
story
short,
MBS
investors
wanted
more
assurances,
which
generally
meant
borrowers
had
to
pay
points
upfront.
This
ensured
a
profit
even
if
the
mortgage
was
short-lived
and
paid
off
in
a
short
period
of
time.
It
also
allowed
lenders
to
keep
mortgage
rates
from
going
even
higher,
completely
decimating
lending
volume
in
the
process.
Conditions
have
since
improved,
and
it’s
again
possible
to
get
a
home
loan
today
without
paying
points.
But
you’re
still
seeing
lenders
offer
rates
with
points
attached.
And
the
reason
why
is
because
you
can
offer
a
lower
rate!
Obviously,
it
looks
a
lot
better
if
you’re
able
to
advertise
a
rate
starting
with
a
5
instead
of
a
6,
or
a
4
instead
of
a
5.
And
that’s
exactly
what
some
lenders
do,
at
least
the
ones
that
lead
on
price
as
opposed
to
service
or
brand
name.
Interestingly,
I
discovered
over
the
weekend
that
this
isn’t
a
new
phenomenon.
Back
in
the
1980s
and
1990s
this
was
also
common.
Homeowners
Paid
Over
Two
Points
on
Average
from
1981
to
1991
Remember
those
super
high
mortgage
rates
in
the
1980s?
Well
if
you
don’t,
the
30-year
fixed
climbed
as
high
as
18.45%
in
late
1981,
per
Freddie
Mac.
Despite
the
rate
being
astronomically
high,
the
average
amount
of
discount
points
required
at
that
time
was
a
whopping
2.3.
In
other
words,
on
a
$250,000
loan
amount,
you’d
be
talking
about
$5,750
in
fees
just
to
obtain
that
ridiculously
high
rate.
Did
that
mean
a
borrower
who
only
paid
one
point
would
have
been
subject
to
a
20%
rate?
Perhaps,
I
don’t
know,
but
that’s
generally
how
it
works.
If
you
opt
to
pay
less
or
nothing
upfront,
your
mortgage
rate
will
be
higher,
all
else
equal.
This
average
amount
of
points
paid
by
homeowners
hit
its
peak
in
1984
and
1985,
when
the
average
amount
paid
was
2.5
points.
So
for
every
$100,000
borrowed,
a
home
buyer
would
have
to
fork
over
$2,500.
And
again,
to
wind
up
with
a
mortgage
rate
around
12
or
14%
(they
came
down
a
bit
after
peaking
in
1981).
Are
Mortgage
Rates
That
Require
Upfront
Points
Legit?
Now
that
brings
me
to
modern
day,
where
lenders
still
charge
multiple
points
for
the
lowest
rates.
While
not
obligatory,
as
I
mentioned,
you
do
typically
have
the
option
to
pay
points
at
closing.
The
tradeoff
being
a
lower
interest
rate
if
you
do.
This
is
essentially
what
home
builders
have
been
doing
to
draw
in
business
with
their
permanent
and
temporary
rate
buydowns.
They’re
buying
the
rates
down
to
lure
in
home
buyers,
which
allows
them
to
keep
their
asking
prices
steady
(or
even
rising).
Those
who
comparison
shop
mortgage
rates
may
also
find
that
some
lenders
are
offering
“below-market
rates”
versus
what
they
see
in
the
mortgage
rate
surveys.
The
way
lenders
accomplish
this
is
by
asking
you
to
pay
points
upfront,
which
are
a
form
of
prepaid
interest.
So
the
rate
offered
might
be
6%
with
no
points
or
for
a
no
cost
refinance.
But
5.25%
if
you’re
willing
to
pay
a
point
(or
more
than
a
point)
at
closing.
These
are
entirely
legit
rates,
they
just
cost
money
to
obtain
them.
And
that
cost
is
essentially
an
investment
in
the
mortgage
that
you’ll
only
realize
if
you
hold
it
long
enough.
Paying
Points
at
Closing
Might
Not
Be
the
Best
Move
While
the
promise
of
a
lower
mortgage
rate,
especially
something
that
starts
with
a
4
is
enticing,
it
might
not
be
worth
it.
Let’s
consider
a
quick
example
where
you
pay
two
points
to
get
a
rate
of
4.875%
versus
a
rate
of
say
5.75%
with
no
points.
On
a
$500,000
loan
amount
that
would
set
you
back
$10,000
at
closing.
The
monthly
payment
would
be
$2,646.04
versus
$2,917.86,
or
roughly
$272
per
month.
While
that’s
a
decent
amount
of
savings,
it
would
take
about
three
years
to
breakeven
on
the
upfront
cost.
Now
imagine
then
30-year
fixed
falls
to
the
mid-4s
or
even
lower
during
that
span.
Or
if
you
want
to
sell
your
home
and
move.
You’ve
already
paid
for
the
lower
rate
and
might
not
get
the
full
benefit.
This
is
not
to
say
it’s
a
bad
decision,
since
you,
me,
and
everyone
else
doesn’t
know
what
the
future
holds.
But
you’re
making
a
conscious
choice
when
paying
points
and
there
are
no
refunds.
If
we
look
back
at
those
folks
who
paid
2.5
points
back
in
1984
for
a
14%
rate,
only
to
see
rates
fall
to
sub-10%
by
1986,
it
makes
you
wonder.
creating
this
site,
I
worked
as
an
account
executive
for
a
wholesale
mortgage
lender
in
Los
Angeles.
My
hands-on
experience
in
the
early
2000s
inspired
me
to
begin
writing
about
mortgages
18
years
ago
to
help
prospective
(and
existing)
home
buyers
better
navigate
the
home
loan
process.
Follow
me
on
for
hot
takes.
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