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How do we navigate the rise in interest rates from historically low levels during the COVID-19 pandemic? The answer is twofold, but let’s first explore the background.
During the pandemic, with much of the country in economic shutdown and many individuals facing unstable incomes, the government needed to stimulate spending to keep the economy moving. To do so, they purchased bonds and mortgage-backed securities. This had a similar effect to a homebuyer buying down their rate, artificially lowering interest rates to as low as 3% in some cases. Historically, according to data from The Mortgage Reports over the last 48 years, the average mortgage interest rate has been around 7.42%. Today, the current rate hovers around 6.96%, as reported by Mortgage News Daily. These artificially low rates couldn’t last forever, and once the economy stabilized, rates returned to more typical levels. However, because consumers had become accustomed to these lower rates, there was a subsequent rate shock when they reverted to normal levels. This has slowed overall home-buying activity, but not enough to decrease home values.
In fact, home values across the United States—specifically in Wake County, NC—have continued to rise, despite the slowdown in home purchases. In Wake County, according to MLS data, home values have increased by 5.4% over the last 12 months. So, what can we do now, with rising home values and less favorable interest rates than we saw between 2020 and 2022? The bad news is that the cost of buying a home will continue to rise. The good news is that interest rates fluctuate. By purchasing a home before the spring and summer buying seasons (which typically bring even higher values), you can benefit from increased equity. Additionally, there are options available to temporarily lower your rates, which could make a difference in the short term while leaving room for future refinancing.
Two key options for this strategy are Buydowns and Discount Points. One is a more long-term solution, while the other offers flexibility for both short and long-term considerations. Both options have their merits.
Discount Points
Let’s start by examining Discount Points. Here’s a hypothetical scenario: Assume a perfect world with a 20% down payment, a 740 credit score, and a loan for a $500k home. At an interest rate of 7.25%, your monthly payment would be approximately $2,728.71 P.I or principal and interest payment only.
Now, let’s say you put $9,000 toward discount points. This would reduce your interest rate to 6.75%, lowering your monthly payment by $135, to $2,593.71, P.I. However, it would take about 5.5 years for you to recoup that $9,000 through the monthly savings, meaning you wouldn’t begin to see the true benefit until after that time.
Discount points are most beneficial for those who plan to stay in their homes for the long term and are confident that interest rates won’t drop significantly during that time. If, for example, rates fall to 5.25% in year 3 and you decide to refinance, you would lose the money you spent on the discount points without realizing the full benefit.
Another important consideration is that discount points come out of your pocket—not the seller’s. So, if you opt for this route, not only do you run the risk of losing that money if you refinance, but you’re also using your own funds for the upfront cost.
Buydowns
Now, let’s explore an alternative with more flexibility: a Buydown. This option can often be negotiated as a seller concession, which offers additional benefits.
Using the same scenario, let’s say that instead of paying for discount points yourself, the seller agrees to contribute $9,000 toward a 2/1 buydown. This means that in the first year, you would have a 5.25% interest rate, resulting in a monthly payment of $2,208.81 P.I. In the second year, your rate would adjust to 6.25%, with a monthly payment of $2,462.87 P.I. Over the two years, you would save $6,238.80 in the first year and $3,190.08 in the second year—totaling $9,428.88. In this scenario, you would not only recoup the $9,000 you initially “paid” for the buydown but also save an additional $428.88, and importantly, it wasn’t your money to begin with; it was a seller concession.
Moreover, the money you save in the first two years provides you with greater flexibility. If interest rates drop in the future—say, to the 5.9% range by 2027—you can refinance and benefit from a lower rate, leading to even more savings. Additionally, if rates fall before you refinance, any unused portion of that initial $9,000 can be rolled over toward the principal of your mortgage.
The way this works is simple: The seller contributes the $9,000 to an account, which is then applied to lower your monthly payments. If any of the $9,000 is unused, it will be applied to the principal balance of your mortgage.
Recap
Both Discount Points and Buydowns offer ways to lower your interest rate, each with their own advantages depending on your circumstances. Discount points are generally more beneficial in a stable rate environment, where you expect rates to remain relatively the same for 5-7 years and plan to stay in the home long-term. However, if interest rates are volatile—as they are now—or you plan to sell in the next 3-5 years, or anticipate frequent relocations for work, a buydown may be a better option for you.
Both strategies can help you secure a lower rate and enter your dream home before prices rise further. As always, if you have any questions or are considering buying or selling, fill out the contact form on the site, and I will get in touch as soon as possible!
Kyle Petty
NC Real Estate Advisor
Better Homes and Gardens Real Estate Paracle
(609) 480-6455
Sources
https://www.fbmortgageloans.com/Discount-Points-vs-Mortgage-Buydown-Whats-the-Difference/
https://www.fhfa.gov/sites/default/files/2024-09/Market-Estimates_2025-2027.pdf
https://themortgagereports.com/61853/30-year-mortgage-rates-chart
https://longforecast.com/mortgage-interest-rates-forecast-2017-2018-2019-2020-2021-30-year-15-year
