How to Negotiate an Interest Rate
Negotiating for a better price on the purchase of a property is normal and expected. Knowing how to negotiate an interest rate on a mortgage is really a different challenge. It comes down to having a plan in place before you proceed.
Unfortunately, it is not as though you can tell a lender, “We will pay it at 3.6%” and see if they reduce to 3.8%. Your “negotiating” should be done before you get to that point.
No matter how good your connections may be, it is a solid strategy to comparison shop. When it comes to mortgages, there is much more to it than the interest rate and who you know. Learn as much as you can about the types of mortgages available and the fees that go with them.
There are times when an existing relationship with a bank, savings & loan, or credit union can result in securing a lower rate. There may be perks they offer to entice. Sometimes an institution will offer a discount to customers in good standing from other accounts or products over the years. Having a current or previous mortgage there should make a positive difference for you.
Since you are not required to commit immediately, getting a “special” quote from a lending institution can be used as a negotiating tool with other lending sources. There are different ways to approach mortgage brokers as well as lending institutions.
It can make a difference in how to negotiate an interest rate if refinancing versus purchasing a property. The institution holding your current mortgage could offer the best rate in order to keep your business. For example, if you have 20 years remaining, they may see this as a chance to receive monthly payments for 30 years. A lower interest rate now becomes more profitable for them over a longer term.
Either way, you still have the right to approach other lenders or institutions in an attempt to save. One approach is to tell them the rate and terms you have been offered up front. Chances are they will tell you whether or not they can beat what you have and why. It is also possible that they may come back with different options to explore.
CONSIDERATIONS FOR NEGOTIATING A MORTGAGE
When it comes to a mortgage or a refinance, there are several considerations to negotiate. This is unlike CD’s, money market, or other investments you can negotiate. Mortgages have upfront fees, points, closing fees, and may have variable rates. In some cases there may be prepayment penalties to consider.
This is why it is important to understand the entire mortgage process before you negotiate. Your current financial status is also a determination in your ability to secure the best possible rate.
Having a solid credit score and payment history can direct impact the rate you can secure. Many lenders will review your debt to income ratio within their consideration. A potential borrower clearly living from paycheck to paycheck will face more challenges to find the lowest possible rate.
Upfront fees and closing costs are an important step as you negotiate. Some lenders require these in advance in order to initiate the actual loan process. Other lenders could be able to absorb these costs into monthly payments and/or for the end of the term.
Consequently, the lowest rate you receive may not be the “cheapest” loan for you. Quite often, the startup costs can exceed, but are in addition to, what your monthly payments will amount to. Your current financial situation could dictate your best solution. If you could afford to pay the additional startup fees upfront, you could lean toward the lowest monthly payment. Conversely, if you prefer not to do so, a higher monthly payment long term without the initial cost could be your best option.
One additional cost to consider for a mortgage loan or refinance is “points”, also known as “discount points”. This amount, paid in advance to your chosen lender, lowers your rate while further reducing your monthly payment. If your current financial situation allows this possibility, it is worth doing your research. Note that not all lenders allow discount points in all states, and that the cost may vary. Again, this is why doing your research is crucial to knowing how to negotiate an interest rate.
For example, suppose your intended mortgage is for $200,000, and that one discount point costs $2,500. For a 30 year fixed rate mortgage, suppose your rate would be 3.75%. Your total interest costs over 30 years would come to just over $133,000. (Note that is the interest cost, in addition to the actual $200,000.)
Next, suppose you purchase the discount point for $2,500. Your rate would be dropped to 3.50%. Doing so would reduce your paid interest to just over $123,000, saving you more than $10,000 in the long run!
Whether or not you are able to afford the $2,500 now or not could influence your decision. Yet, having these two options may not be enough. Suppose you could get a rate of 3.60% without any discount points. This would decrease your monthly payment and long term interest cost, while saving you the $2,500. Perhaps that is better for you.
INCREASING YOUR OPPORTUNITIES
Look at the opportunities you now have because you shopped around and compared. This example scenario involves three separate lenders. You could go to the one charging 3.75% and tell them that you have someone that will do it for 3.50%. Next, approach the one offering 3.50% with one point, telling them you can get 3.60% without buying a point.
While doing so, you know which one is best for you in the event that none of them budge.
This process can take a short time, or you can begin your research with months to plan. You might decide, for example, to pay down current debt to help your credit score. Doing so could lead to a better rate and long term savings. Or, you decide to save and make a larger down payment, resulting in needing a smaller mortgage loan to start with.
There are no right or wrong answers on which approach to take. It helps to have done your homework, shop around, and be dealing from strength. Knowing how to negotiate an interest rate can save you thousands of dollars both short and long term.