The Consumer Financial Protection Bureau (CFPB) is monitoring the increasing payment of “discount points” by homebuyers and the potential risk this may pose to consumers.
The percentage of homebuyers paying discount points doubled from 2021 to 2023, and the increase was even greater among those with lower credit scores, the agency said in a Friday (April 5) press release.
“Higher interest rates on mortgages have led buyers to pay upfront fees to lower their interest payments,” CFPB Director Rohit Chopra said in the release. “The heavy use of ‘discount points’ suggests that many borrowers are uncertain about their ability to refinance in the future.”
While borrowers pay these one-time fees at closing to a lender in exchange for a lower interest rate, most only benefit from the discount points if they keep their mortgage long enough to save more on interest than they paid upfront, according to the release.
Federal Housing Administration (FHA) borrowers with low credit scores were especially likely to pay discount points. This suggests that lenders are using discount points to lower borrowers’ monthly payments and debt-to-income ratio and thereby help them qualify for a mortgage, the release said.
While 65% of all FHA borrowers paid discount points, 77% of those with credit scores below 640 did so, per the release.
“As discount points have become a more common part of the market, it becomes more important to understand the factors driving the increase in discount points and how borrowers end up paying for them,” the CFPB said in a Data Spotlight released Friday.
PYMNTS Intelligence has found that consumers are actively seeking better deals on mortgages and other credit products.
Interest rates and payment terms are the most important factors for consumers when choosing a financial institution (FI), and they are the primary reasons for account holders to switch to another FI with better offerings, according to “How Credit Product Rates Impact FI Selection,” a PYMNTS Intelligence and PSCU collaboration.
In another recent move by the CFPB, the agency said Thursday (April 4) that it is monitoring video games and virtual worlds to ensure their compliance with federal consumer financial protection laws. A growing number of these platforms are adding banking options and payments, the CFPB said.