Nationally, the average 30-year fixed-rate mortgage rate is holding steady in the high-6% range; it’s currently at 6.71% per Freddie Mac’s Primary Mortgage Market Survey. While that has mercifully backed off from the highs of the last few years (rates reached nearly 8% in 2023), it’s still a disappointing development for prospective homebuyers who are now contending with rates last seen prior to the Great Recession.
And, unfortunately, industry experts don’t expect the situation to improve any time soon. Both Fannie Mae and the Mortgage Bankers Association (MBA) expect rates to remain at these levels through 2027, with the MBA also expecting rates to remain at 6.7% through 2028.
So, if interest rates aren’t expected to decline, what’s a prospective homebuyer to do to improve affordability? Should you make a larger down payment, should you settle on a builder you don’t love that’s offering rate discounts, or should you buy mortgage points?
The ultimate answer will come down to your specific situation, but it’s worth taking a moment to crunch the numbers so that you can get a sense of whether those options are even worth pursuing.
3 Paths to a Lower Monthly Mortgage Payment
Right now, the St. Louis Fed has the average sales price of a house in the U.S. at $502,700. This will vary based on geography and local markets, but we’ll use it as the base case for our purposes.
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To avoid the added costs of Private Mortgage Insurance (PMI), you’ll need to start off with a 20% down payment (it doesn’t make much sense to buy mortgage points if you’ll be hit with an additional 0.5%-2.25% for PMI because you’re not putting 20% down).
Typically, PMI is a percentage of the total loan balance paid monthly (1% PMI on a $500,000 loan is $5,000, or about $417 a month) in addition to principal and interest payments, but it may be charged as an upfront cost depending on your lender.
PMI doesn’t add any equity to your home; it’s simply an added expense homebuyers pay for carrying a “riskier” loan (for the lender).
Now, PMI will drop off your loan once you reach a 78% loan-to-value (LTV) ratio, so it’s not a permanent expense, but it’s best avoided if possible.
Assuming a 20% down payment, the principal and interest payment on a 30-year mortgage (at 6.71%) for a home priced at $502,700 is $2,598 per month; this does not include property taxes or insurance. With that established, let’s look in more detail at the cost-saving options mentioned above.
Builder Rate Buydowns
One advantage that buyers of newly built homes have over buyers of existing homes is the possibility that their builder may be offering rate buydowns, where the builder (who normally requires that you work with their preferred lender) pays to reduce rates for all or a portion of the life of the loan.
One- or two-year buydowns are the most common offers builders are making these days and would reduce your mortgage rate for the first year or two of the loan.
A 1% buydown from your builder saves you about $261 each month but adds the risk that, when the buydown expires (if it does), your monthly mortgage payment will rise by that amount.
While not as common, a buydown for the life of the loan (where the builder basically buys mortgage points for you) removes that risk in the future and is generally better for buyers.
Even with a buydown for the life of the loan, it’ll be very builder-specific, in which case you’ll need to weigh it against the other important factors like home design and quality, amenities, proximity to work/school/health care, etc.
Buying a home you’re not happy with just because it becomes more affordable is a recipe for buyer’s remorse, so it probably shouldn’t be the deciding factor, but rate buydowns should be part of the consideration.
A Bigger Down Payment
Making a larger down payment instead of buying mortgage points does offer some advantages. For one thing, the bigger down payment becomes immediate equity in your home (subject to the movement of housing prices) while also saving you money every month. For our base case, a 20% down payment is $100,540 while a 23% down payment would be $115,621.
The extra 3% down drops your monthly principal and interest payment from $2,598 to $2,500 and drops your total cost of the loan (assuming you pay it off over the 30-year life of the loan) from $935,179 to $900,109, saving you $35,070 in interest.
One caveat: The average life of a mortgage in the U.S. is only about 7-8 years due to home sales and refinancing, so the amount you actually save in interest would not be fully realized unless you lived in the home for 30 years without refinancing.
Equity aside, if you’re just looking at cash availability, you’d recoup the extra $15,081 of additional down payment in about 13 years ($15,081 additional down payment/$98 monthly payment savings).
That’s a long time to recoup the upfront cost, but if you’re planning on staying put, it’s not a bad option given the total interest savings.
Buying Mortgage Points
Part of the reason we opted to use an additional 3% down is that many lenders cap the amount you can buy down a mortgage rate at three quarter-points, which makes it a similar (but not identical) up-front amount. A point reduces your mortgage rate by 0.25% at the cost of 1% of the total loan.
Buying three mortgage points would drop your 6.71% mortgage rate to 5.96% and would reduce your monthly principal and interest payment from $2,598 to $2,401, saving you $197 per month for the duration of the loan (and reducing the total cost of the loan to $864,295).
The cost of those points would be $12,065 ($502,700 - $100,540 down payment = $402,160 x 3% = $12,065) and, based on the savings of $197 per month, you’d recoup that in just over five years.
Buying points doesn’t add to your equity in the same way that a larger down payment does, but it doubles the amount you save in monthly payments.
And you can really see the effect on the total loan cost, as the total cost is $35,814 lower than it would be with the larger down payment (and $70,884 below the base case of just 20% down).
In other words, if you’re planning on staying in the same home for the next 30 years, buying points offers a bigger financial advantage than the larger down payment.
If, on the other hand, you anticipate refinancing relatively quickly, or even in the next few years, buying mortgage points may be an added up-front expense that you do not fully recoup.
That was pretty math-heavy, so the main takeaway is this: The longer you plan on being in a home without refinancing, the larger the advantage of buying mortgage points. Whereas, if you anticipate refinancing sooner rather than later, and have extra cash to commit, the value of a larger down payment isn’t hampered by a possible refi.
So, see what offers builders in your area are making, look for rate-buydown promotions from lenders (they’re out there), and if you want to get into the nitty-gritty of the math, this mortgage calculator from Bankrate.com is a good place to start.
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*This post has been updated from a previously published version.
