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

“Discount points” have uncertain value for borrowers

The Consumer Financial Protection Bureau (CFPB) issued a new report today finding that more borrowers paid “discount points” upfront as overall interest rates rose. The percentage of homebuyers paying discount points roughly doubled from 2021 to 2023. The increase was even greater among borrowers with lower credit scores. While discount points may provide advantages to some borrowers, the financial tradeoffs are complex. The CFPB is monitoring these increases and potential risks to consumers.

“Higher interest rates on mortgages have led borrowers to pay upfront fees to lower their interest payments,” said CFPB Director Rohit Chopra. “The heavy use of ‘discount points’ suggests that many borrowers are uncertain about their ability to refinance in the future.”

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 one percent of the loan amount, but discount points have no fixed value in terms of the change in interest rate. Most borrowers only benefit from discount points if they keep their mortgage long enough that the cumulative monthly savings from the reduced interest rate outweigh the upfront costs.

The report published today used quarterly Home Mortgage Disclosure Act (HMDA) data from 2019 through the first three quarters of 2023. The report 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. 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 in order to qualify for a mortgage. Nearly 77 percent of FHA borrowers with credit scores below 640 purchased discount points, while 65 percent of all FHA borrowers paid discount points.

Discount points were most common among borrowers with cash-out refinances, with 87 percent of those borrowers in September 2023 paying discount points, up from 61 percent in January 2021. Nearly 61 percent of borrowers with home purchase loans and 58 percent of borrowers with non-cash-out refinance loans also paid discount points in September 2023, up from 31 and 36 percent in 2021, respectively. 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.

HMDA data are the most comprehensive source of publicly available information on the U.S. mortgage market. In addition to submitting annual application-level data, the largest mortgage lenders must submit quarterly HMDA data to their regulators. Aggregate statistics from the quarterly data are publicly available in the HMDA quarterly graphs.

Read the report, Trends in Discount Points amid Rising Interest Rates.