Rates Hold Near 7.33% Heading Into Fed Week: Temporary Buydown or Discount Points, Which Is Worth It?

The average top-tier 30-year fixed rate is 7.33% per Mortgage News Daily, up three hundredths on Friday but down from 7.37% a week earlier and well under the 7.61% 52-week high. The Federal Reserve meets this Wednesday, October 28, and with rates still above 7 percent, two questions keep coming up: should I pay points to buy the rate down, or ask the seller for a temporary buydown? Here is how each one works, with the payment math on a $450,000 loan.

What happened this week

Rates were choppy but landed a little lower for the week. Mortgage News Daily reported a sharp drop on Thursday, then a small uptick on Friday as tech stocks steadied and bond yields rose with them. The 7.33% reading ties the October 15 level and is the second lowest since September 23. Oil prices have stayed high on the Middle East headlines, the 10-year Treasury yield is still above 5 percent, and the Fed decision on Wednesday adds one more event that can move rates in either direction. I do not predict what happens next. My own posted 30-year conventional rate is 7.125% for well-qualified borrowers, and the details are on my live rates page.

Option one: a temporary 2-1 buydown

A 2-1 buydown lowers your interest rate by 2 points in the first year and 1 point in the second year, then the rate steps up to the full note rate for the remaining 28 years. The cost of the lower payments is prepaid at closing, and in many purchases the seller or builder pays it as a credit. You still qualify at the full note rate, so it helps cash flow, not approval.

Take a $450,000 loan at 7.33%. The principal and interest payment is about $3,094 a month. With a 2-1 buydown:

• Year 1 at 5.33%: about $2,507 a month, which is $587 less.
• Year 2 at 6.33%: about $2,794 a month, which is $300 less.
• Year 3 and after at 7.33%: about $3,094 a month.

Add it up and the buydown is worth roughly $10,645 over the first two years, so that is about what the credit needs to cover. The catch is the payment goes back up in year three. A buydown makes the most sense when you expect your income to grow, or you plan to refinance if rates improve. Do not count on a refinance, because no one knows where rates will be in two years.

Option two: discount points

A discount point costs 1 percent of the loan amount and lowers the rate for the entire life of the loan. The rate reduction varies by lender and day, but as an illustration say one point buys about a quarter point off the rate. On $450,000, one point costs $4,500. Dropping from 7.33% to 7.08% lowers the payment from about $3,094 to about $3,018, a savings of roughly $76 a month. Dividing the cost by the savings gives a break-even of about 59 months, or just under five years. Stay in the loan longer than that and the points pay off. Sell or refinance sooner and they do not.

Which one fits your situation

If you are buying and the seller is willing to give a credit, a 2-1 buydown can ease the first two years while you settle in, and it can also be a smart use of a credit that cannot be applied to anything else. If you plan to stay in the home for many years, points usually win because the savings last as long as the loan. If you might move or refinance within about five years, skipping points and keeping cash is often the better call. Also compare the buydown against simply asking for a price reduction: a $10,645 price cut lowers the loan balance and your payment for good, which is worth running the numbers on. Seller credits are limited by loan program, so ask me about the cap for yours.

For the timing side of this week, my earlier posts on lock strategy around big events and refinance break-even cover how to think about locking, and the DSCR post covers investors.

The bottom line

The 30-year fixed is 7.33% per Mortgage News Daily, down from 7.37% a week ago and below the 52-week high of 7.61%. On a $450,000 loan, a 2-1 buydown trims the payment by about $587 a month in year one and $300 in year two, while one point at an illustrative quarter-point reduction saves about $76 a month and breaks even in roughly 59 months. Neither is automatically better. The right choice depends on how long you will keep the loan and who is paying. I cannot tell you where rates go after Wednesday, so pick the structure that works at today's rate.