Mortgage interest rates are indeed negotiable, and industry experts advise you to negotiate the terms of a mortgage and shop with multiple lenders or banks before settling on an interest rate. Mortgage interest rates fluctuate daily and sometimes even more frequently. Various economic and global factors as well as your mortgage negotiation skills impact the mortgage rate you receive. Arm yourself with basic mortgage negotiation tips before stepping into banks to apply for a mortgage.
TL;DR (Too Long; Didn't Read)
Whether you're refinancing a current property or preparing to shop for your first home, try to negotiate with the lender for the best rate possible. This involves shopping multiple lenders and comparing their written quotes.
Banks Can Work With Fees
Banks typically charge an origination fee for originating, or making, the loan. An origination fee is separate from other common lender fees, such as a credit report fee, application fee or the processing and administrative fees lenders often charge. The amount and types of fees charged by a lender depend on the bank, but you can generally get the fewest and most reasonable fees by doing your homework, understanding which are necessary and which are "junk" fees and then negotiating them with the bank.
It's generally easier to negotiate mortgage rates and loan charges with the bank than it is to negotiate third-party fees such as escrow and title costs. Interest rates, the mortgage origination fee and other loan-related fees are proprietary to the bank. Banks have more flexibility to change these loan-based fees to fit the borrower's budget than fees set by other companies, such as the appraisal company, the notary service or title and escrow agents' fees, over which they have no control.
Basic Mortgage Negotiation Tips
The best way to negotiate mortgage interest rates with a bank is to be informed. Ask your loan officer at the bank to explain rates and fees to you throughout the entire process and ask further about anything you don't understand. You can ask the lender to justify each one of their fees, including the mortgage interest rate, the "points" or loan origination fee and discount fees, if any. Also, shop your mortgage with at least two different banks and ask for written estimates from both, including the fees, interest rate and loan terms. This quote or estimate is known as a good faith estimate.
Where to Shop for Mortgages
You can shop amount thrift institutions, commercial banks and credit unions. Nonbanks that also make mortgages include mortgage companies and mortgage brokers. Brokers do not lend money directly but rather shop your loan among various banks and mortgage companies on your behalf. You may include a broker in your list of lenders and take a broker's estimate or quote to the bank to negotiate a better interest rate as well. Although brokers have access to many banks, even the banks to which you are planning to apply directly for your mortgage, the rates a broker offers you may be higher or lower than the rate the bank offers you. Brokers are not obligated to find you the best interest rate. Unlike with banks, you typically pay a broker an additional fee for its services, which may be in the form of points or a higher interest rate. Ask a broker how exactly you will compensate them for the service of brokering your mortgage if you do end up using them instead of a bank.
A Point About Points
Banks can maneuver your interest rate by adjusting the amount of points you pay. One point equals 1 percent of your loan amount, and by paying additional points to the bank, you can lower your rate. These are known as discount points or buying down the rate. The reverse is also true: You can negotiate a higher interest rate and get the bank to cover all or a portion of your closing costs. This is known as lender-paid closing costs or a no-closing-cost mortgage.
You may see banks advertise no-closing-cost loans, but in actuality, all mortgages come with closing costs. Banks package their loan offers differently to make them more attractive to borrowers. For example, the bank may offer an extraordinarily low interest rate compared to other bank offers you've received, but you must consider that the fees for such a seemingly low interest rate may come with higher closing costs, including points. To help you decipher the best loan offer all around, inquire about the annual percentage rate, or APR, in addition to the interest rate. The APR better measures the total cost of a mortgage, encompassing the origination fee, discount points and other loan-related fees from the bank. Both the interest rate and the APR are expressed as a percentage, making an apples-to-apples comparison possible.
You Can Negotiate Until Signing
Waiting until you are sitting at the proverbial closing table ready to sign an immense pile of loan documents in front of a notary public isn't exactly the best time to approach your loan officer for a better rate. Although it is allowed, negotiating at the last moment doesn't mean your bank will agree to change your rate. Typically, you want to ensure you get the best interest rate the bank can offer you for your particular loan scenario well before loan signing. This allows you to lock in your interest rate for a set amount of time, preventing any unexpected rate changes in the market from increasing your interest rate right before the loan funds, or closes.
Although trying to strong-arm a better interest rate out of your bank under the threat of not signing is possible, there are better ways to get a low interest rate if you prepare in advance. With enough research and shopping, getting a competitive interest rate from the bank before loan signing ensures a smoother closing for all parties involved. Any last-minute changes to your mortgage as well as any delays can cost you more in the long run. For example, when buying a home, signing your loan-closing documents on time is an essential responsibility in your sales contract. Jeopardizing your loan closing may also jeopardize your home purchase.
Last-Minute Mortgage Renegotiation
Certain circumstances might compel you to renegotiate an interest rate right before signing. For example, if the interest rate you were last quoted by the bank is not honored at loan signing, and you suddenly see a higher interest rate on your loan documents, it is acceptable to hold off on signing. Before signing, ensure you fully understand why the bank changed your interest rate and whether it was previously disclosed to you. You can then determine whether you deserve a better interest rate or accept the rate and loan terms as they appear on the loan-closing documents.
Banks must redisclose interest rate changes and certain other increases to your closing costs and obtain your signature for them before they issue your final loan documents for signing. Mortgage regulations protect consumers from bait and switch tactics that can mislead borrowers into signing for mortgage interest rates and terms to which they did not previously agree. Ask each bank at which you apply about its disclosure procedures if changes to your interest rate or mortgage terms become necessary.
- Consumer Financial Protection Bureau: Am I Allowed to Negotiate the Terms and Costs of My Mortgage at Closing?
- Consumer Financial Protection Bureau: Comparing Loan Offers
- Mortgage 101: Discount vs. Origination Mortgage Points
- Bankrate: The Difference Between Interest Rate and Annual Percentage Rate, or APR
Karina C. Hernandez is a real estate agent in San Diego with a background in mortgage origination. She has been licensed since 2004 and received a B.A. in English from UCLA. Karina has written on a variety of financial topics, including credit, real estate finance, insurance and taxes for online channels such as eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.