The return of discount points?

In the effort to curb runaway inflation, we saw Wednesday that the Federal Reserve deployed a 0.75 percentage point rate hike, which was the highest such hike in 28 years. Riding a fine line to lower demand and reduce pricing, many remain concerned on whether the economy will slide into a recession ultimately. Per CNBC:

"The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and saving rates consumers see every day."

The hope being that this will have many good "trickle down" effects, some of which would impact global mobility programs.

What impact will global mobility programs see?

One of the bigger impacts that mobility programs will experience is that of rising mortgage rates. Rising mortgage rates have made homebuying considerably more expensive than at the start of the year with the average interest rate for a 30-year fixed-rate mortgage reaching 6.28% this week — up more than 3 full percentage points from 3.11% at the end of December. Up from 5.3% just a month ago, means that is the highest mortgage rate since 2008. The 3.2 percentage point jump in mortgage rates over the past year also marks the biggest upward swing since 1981. In America’s 100 largest regional housing markets, the typical new mortgage payment has spiked 52% over the past six months. Looking ahead, it is difficult to say just where they will ultimately go by the end of the year or this time next year. 

For a relocating homeowner, on a $300,000 loan, a 30-year, fixed-rate mortgage would cost them about $1,283 a month at a 3.11% rate they could have gotten at the end of 2021. If they now take a mortgage where they pay 6.28% instead, that would cost an extra $570 a month or $6,840 more a year and another $205,319 over the lifetime of the loan, according to Grow’s mortgage calculator. 

This graph from Fortune, shows a variety of different housing markets and how mortgage payments for the typical new borrower have jumped over the past 6 months:

While rates are rising, it is certainly not a time to panic. Mortgage rates are actually one of the least significant factors determining the strength of the real estate market. Price by far outweighs mortgage rates. Consider that even when we had historically low rates (below 3%) over the past few years, home prices have gone through the roof and only a third of Californians could qualify for a median-priced home!  Ultimately, more folks can qualify for a $500,000 mortgage with an interest rate at 9% than an $800,000 mortgage at 3%.  However, while the goal is to get home prices corrected, until that happens, it will be more costly for a while for people to buy homes.

Knowing that rates are likely to continue rising may motivate some employees to get moved sooner actually, before those rates rework that calculation we just went through above, costing employees even more. At the same time, there may be some relocating employees trying to figure out how to afford to buy a home in this currently escalating market, especially as prices are not going down, only not rising at the same pace as before.

So what can mobility programs do?

While we work through this full-blown housing correction, and watch for home prices to drop, what can a mobility program do to support and encourage talent to move ahead and relocate? Making the purchase of a home a little bit easier might be the best place to focus. Enter "discount points"! Providing discount points is something that a company can offer to help an employee address some of the increased cost due to rising mortgage rates when buying a home. In essence, a company can contribute a point, or even two, which allows the employee to pay more money upfront in exchange for a lower mortgage interest rate. The companies help up front, allows the employee to qualify for a lower mortgage rate, have lesser payments each month, and could equal a huge savings over time. Paying a full point will typically “buy down” an interest rate by between .25% and .5%, depending on market conditions. 

The size of the interest rate reduction will vary by bank. Another benefit to the employee is that discount points can be tax-deductible, depending on which deductions they claim on their federal income taxes. To write off discount points, or any other qualifying mortgage interest payments, they would need to itemize their deductions using Schedule A of IRS Form 1040. (we recommend connecting with a tax provider on the details!)