With mortgage rates recently reaching a nearly 20-year high, Weichert has been fielding inquiries from companies on paying points to buy down the mortgage rate for employees purchasing homes in the U.S. Not surprising since, in addition to increasing home prices, the drastic escalation in mortgage rates is putting added financial pressure on relocating employees, and companies are feeling the sting of a growing reluctance to move.
Seeking to balance cost control, corporate talent objectives, and employee concerns, organizations are exploring reasoned methods to provide support. Solutions during past increased rate cycles included mortgage subsidies, cost of living allowances (COLAs), and covering loan “discount points” paid upfront to the lender to buy down the interest rate using the time value of money.
Typically, one point (one percent of the loan amount) “buys down” the interest rate of the loan by ¼ percent. Therefore, 2 points reduce the rate by ½ percent, 4 points reduce it by 1 percent, etc. While this may not seem like a big difference, it can reduce the employee’s monthly mortgage payment by hundreds of dollars. Unlike a traditional mortgage subsidy or COLA, which is typically provided on a declining basis over a period of years (typically 3-5), the rate buydown is permanent and persists over the life of the mortgage.
We examined the practices of those within our U.S. Domestic client base who cover home purchase closing costs for their employees. Among this group, 62% will cover some level of loan discount points (separate from points paid as loan origination fees). While discount points are not the only game in town, Weichert Financial Services confirms that most companies have moved away from the traditional direct-billed, 3-2-1 mortgage subsidy in favor of covering discount points. Clients cite administrative burden, cost to value, and parity in the treatment of all employees as reasons to make the switch.
Among Weichert clients, very few (5%) cover more than 3 points. This is likely due to increased scrutiny of lending costs, which has resulted in more stringent Federal guidelines. These guidelines cover fees and associated loan costs, which are examined as part of a holistic loan analysis using a government-mandated tracking and reporting program. Points in excess of 3 will flag the loan as “high cost.”
A few companies give the employee a choice between discount points or subsidy programs, which may cost the company the same amount but offer different benefits for the employee, depending upon how long they intend to occupy their home. And, while they are traditionally mutually exclusive, we do have clients who cover discount points and offer a Cost-of-Living Allowance. Among these programs, clients will use the lowered rate in the final calculation to avoid “double dipping.”
Lastly, where markets are excessively tight or volatile, or mortgage rates may be showing signs of future decreases, some companies have allowed home-purchase-eligible employees to exercise rental assistance benefits and defer the use of their home purchase benefits later when conditions have hopefully changed. Most companies limit this deferment to a 12-month period when they must be used or forfeited.
While few of us have access to a trusty crystal ball, Weichert’s Workforce Mobility and Financial Services experts are ready to help you plan an optimal benefit offering to help your employees Make Work Happen (today and in the future).