To negotiate mortgage rates, first you have to shop
Shopping around gives you the ammo you need to negotiate a lower mortgage rate.
Buyers save $1,500 by getting just one extra quote, and $3,000 for five quotes on average.
Surprisingly, though, many home buyers and refinancers skip the shopping part. About half go with the first lender they talk to.
As a consumer, you should exercise your power to get multiple rates and ask for the best deal.
Not negotiating mortgage rates means you’re leaving money on the table.
Shop for a low mortgage rate (Oct 1st, 2020)
In this article:
4 ways to negotiate your mortgage rate
Many people aren’t aware they can negotiate their mortgage or refinance rate. Actually, it’s totally possible. But it’s not as simple as haggling over percentage points.
To negotiate your mortgage rate, you’ll have to prove that you’re a credit-worthy borrower. And you’ll have better luck if you come to the table with a lower quote from another lender in-hand.
Here are four strategies you can use to try to get a lower rate before you lock:
- Shop around with multiple lenders
- Ask your lender to match a lower rate offer
- Negotiate with discount points
- Strengthen your mortgage application
We cover each strategy in more detail below.
But the basic facts are: If you have strong financials, and you’re willing to look at more than one lender, you can usually find a lower rate for your mortgage.
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How to shop for a lower rate
The best thing you can do to get a low mortgage rate is shop around. You’ll get a unique rate quote from every lender. Compare the interest rate, closing costs, and points included in these estimates. You’ll see which lender actually has the most competitive costs over the life of a 30-year mortgage.
Remember: The company with the lowest upfront mortgage rate might not actually be the “cheapest” company once points, fees, and closing costs are tallied up.
The company with the lowest upfront mortgage rate might not actually be the “cheapest” company once points, fees, and closing costs are tallied up.
Lenders do have some flexibility with the rates they offer you. So if you prefer one lender — maybe because you know the loan officer personally, or have a branch nearby — don’t be afraid to bring them a lower estimate and see if they can match it.
In some cases, the company you want to work with will be able to lower your rate to compete with other loan estimates. Other times it won’t — but it never hurts to ask.
How to negotiate your mortgage rate with discount points
You also have the option to buy “discount points” with most lenders.
Discount points let you pay a little more up front for a lower mortgage rate over the life of the loan. Typically, one discount point costs 1% of the total loan amount, and lowers your rate by about 0.25%.
|With NO discount points||With ONE discount point|
|Cost to purchase discount point||$0||$2,500|
|Interest paid over 30 years*||$133,446||$123,315|
*Loan assumptions: $250,000 home price purchased in the state of Washington with 20% down. Rates and interest payments shown are for sample purposes only. Your own rate and payments will vary.
In this scenario, purchasing one point costs $2,500 at the closing table. But it would save the homeowner more than $10,000 over the life of their loan.
Verify your new rate (Oct 1st, 2020)
A stronger application gives you more negotiating power
This strategy might not be as helpful if you’re close to closing on a mortgage loan. But if you have a little more time before you lock, consider that a stronger application gives you a lot more leverage to negotiate your mortgage rate.
Basically, the better your financials look, the more lenders want your business. And the more they’re willing to negotiate to get it.
That could mean trying for:
- A higher credit score — Take steps to raise your score before you apply
- A bigger down payment — A larger down payment often leads to a lower mortgage rate. You’ll save even more if you can put 20% down and avoid mortgage insurance
- Lower monthly debts — Paying off some debt before you apply leads to a lower debt-to-income ratio (DTI), and often a lower mortgage rate
Of course, raising your credit score, saving for a down payment, or paying off debts all take time.
But if you can wait a little while — or, if your rates looked worse than you thought and you want to make a change before trying again — these are good ways to score a significantly lower mortgage rate.
Why you have to shop to negotiate rates
Mortgages are a lot more regulated than they used to be. As a result, individual loan officers have less flexibility to change rates from customer to customer.
That’s why we talk about tactics like comparing loan estimates and purchasing discount points to lower your rate — rather than trying to bargain with your loan officer.
In today’s market, some lenders are more efficient than others. They lower operating costs by using online applications and digital processing. And those overhead savings often get passed on to customers.
>> Related: The 9 best online mortgage lenders
Other lenders do such high volume that they can afford to charge lower rates and fees, and still turn a profit.
And most every lender has some sort of niche. Some mortgage companies are friendlier toward low-income or low-credit borrowers, some are better for self-employed people, some have jumbo loans for multi-million dollar homes, and so on.
So, shopping around doesn’t just give you ammo for negotiating a lower mortgage rate.
It also helps you pinpoint mortgage lenders that specialize in the type of loan you need. And that lender will be more likely to give you a competitive rate, regardless.
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When you can and can’t negotiate your mortgage rate
In many cases, a lender can’t give you a better deal than they give another similar borrower. That would be considered discriminating against the other borrower.
However, there is some room for negotiation.
For example, lenders are allowed to credit closing costs to a borrower when delays result in a blown rate lock, or when it’s necessary to be competitive if rates suddenly fall.
The big caveat, though, is that the loan officer’s commissionable income must not be affected by the negotiations.
A successful mortgage rate negotiation reduces income to the lender, therefore, but never to the loan officer. This keeps the loan officer’s interest aligned with the customer’s, and this is good.
For customers looking for the best possible mortgage rate, then, it’s always good to ask.
Lenders have less flexibility to change rates or fees, but there are situations when it’s possible — especially when unforeseen events increase your loan closing costs.
How mortgage rate negotiations used to work
A mortgage loan officer or mortgage broker acts as a go-between. They connect you, the consumer, with the lender or investor putting up the money for your home loan.
Brokers work independently, functioning as the sales force for wholesale mortgage lenders. Loan officers are the sales force for the lender that employs them.
Loan officers and mortgage brokers typically work for commissions. And of course, they want to maximize this income. No one wants to work for free.
In the past, there were only three ways for lending professionals to increase their commissions:
- Increase the interest rate
- Increase the closing costs
- Increase the loan amount
This is where the idea of “shopping around” for a mortgage first came from. There was always a chance that at least one loan officer would be willing to work for a smaller commission, which would get you a better deal.
Realizing the system was “unequal”
Loan officers are salespeople and, under the old system of mortgage lending, each had incentive to offer customers the highest mortgage rates possible in order to maximize bank revenues and their own personal commission.
Of course, borrowers were free to check with other lenders to see if they could do better. Just like you can shop for deals when you buy a car.
But a closer analysis of this practice revealed that all customers were not treated equally.
Some customers received very high mortgage rates, and some received very low mortgage rates. Sometimes, loan officers willingly reduced closing costs, and other times they did not. It depended on their individual style of operating.
Mortgage rates sometimes varied by as much as 50 basis points (0.5%) between borrowers of similar traits and characteristics, at the same lender. And it was much easier for discrimination to creep into the process.
Why the system for negotiating mortgage rates changed
Charging different fees to similar customers is a potential mortgage lending law violation. And, ultimately, the government levied fines on a lot of U.S. banks for their “disparate treatment” of customers.
In response, banks stopped the negotiation process.
Loan officers were to receive the exact same commission regardless of what mortgage rate or fees they charged to their customers.
Under the new rule, loan officers had no reason to raise mortgage rates for higher fees; or, to charge more points on a particularly “tough” loan. All loans were worth the same.
If you called your lender and tried to negotiate a lower rate sometime between 2010 and 2014, you would have found it unlikely.
Mortgage lenders didn’t negotiate when it could result in unfair treatment. Your rate was your rate, regardless of what competing lenders offered you.
That’s why today, you generally have to shop around and compare lenders to find the lowest rate.
Lenders might have some wiggle room. But you’re a lot more likely to have a successful negotiation if you can show that another lender offered you a lower rate for the same application. That gives you real leverage.
What are today’s mortgage rates?
Today’s mortgage rates are low, but may be cheaper at some banks than others. It’s always good to shop around to find the lowest rate possible.
We recommend comparing rates from at least 3-4 lenders to find your lowest offer.
Verify your new rate (Oct 1st, 2020)