Mortgage rates have doubled from last year, and you might be wondering: Can I negotiate a better mortgage rate with a lender?
It seems crazy to answer the bank and say, “How about I give you 5.75%?” — but I’m here to tell you that it is indeed possible.
Under certain circumstances, you can negotiate a better mortgage rate – and if you work with our simple mortgage calculator, you will see that lowering the interest rate on a 30-year loan by just 0.25% can save you about $50 per month ( or $600 per year) for your household payments.
So how do you conduct successful negotiations? What should you tell your lender? And how do you position yourself to negotiate effectively in the first place?
Let’s explore how to negotiate mortgage rates.
Can you even negotiate mortgage rates in the first place?
Let’s start with the basics: is it even possible? Will the lenders negotiate, or will they look at you funny, like you’re trying to negotiate a milk price at Publix?
Mortgage lenders will still be negotiating rates in 2022, but you should know that their flexibility to come back with better numbers has been reduced a bit thanks to TRID.
TRID, or TILA-RESPA Integrated Disclosures, is a set of regulations introduced by the Consumer Protection Bureau after the 2008 mortgage crisis. Introduced in 2015, TRID defines what numbers lenders must disclose upfront (principal, interest rate, closing costs, etc.) and limits how much those numbers can change during the pre-approval process.
TRID is good; the transparency it brought killed price gouging and hidden fees, which is why the FTC is considering introducing TRID-like rules for car dealerships.
But it also meant that lenders were forced to take a “what you see is what you get” approach when calculating credit.
They can still budge – and I’ll show you how – but I just wanted to state that you won’t cut 2% or anything crazy.
But 0.125% is definitely possible. Here’s how:
4 Steps to Negotiating the Best Mortgage Rate
1. Improve Your Credit Score Before Applying
Lenders are more likely to try to win over your business if you fit their “Ideal Borrower Profile”.
In essence, they will give you a better rate – and possibly even lower – if your credit score is shiz.
Therefore, improving your credit score should always be a top priority before applying for a mortgage. Check out our guides on how to get a free credit report and credit score, and if your number is below 740, check out How to Improve Your Credit Score, Step by Step.
2. Apply for multiple lenders
Then, by contacting at least three lenders, and ideally five, you can determine who has the lowest rate. And then negotiate with other lenders from there.
Getting multiple mortgage offers may seem obvious, but according to Freddie Mac, half of all homebuyers go to just one lender. Those who apply to only one additional lender end up saving $1,500 over the life of the loan, while those who apply to five save $3,000.
But before you go shopping, consider this: Not all lenders are created equal.
“You have to make sure you’re comparing apples to apples,” says Mark Milam, founder of Highland Mortgage.
Ask the lenders you are reviewing whether they control the process from A to Z. In particular, do they control:
If a lender outsources the valuation process to a third party that backs it up for a month, or their Wells Fargo funding that processes 3,000 requests a day, any of these hidden delays could cost you your house contract.
“In this crazy competitive market, sellers won’t wait,” Mark says.
3. Be honest with your favorite creditors
To build on the previous point, the best lender is not necessarily the one with the lowest possible rate right out of the gate.
Rather, it is someone who is trustworthy, experienced, communicates well, and enjoys working with new home buyers. Because, again, these qualities are more important for closing the deal with the seller in a timely manner.
And they also cannot be negotiated.
So when you’re screening potential lenders, pay close attention to which ones you like and trust the most. Once you have identified one or two that you would trust to fulfill your house contract, just talk to them frankly.
Say you want to work with them, but you’ve found a better rate elsewhere and hope they can match it.
With TRID, the gap between your credit scores doesn’t have to be that big. Your preferred lender may waive some loan origination fees or cut some numbers to get you closer to your desired outcome.
But just be open and honest. Relationships are just as important as speed.
4. Ask about bet locks and discount points
Finally, to potentially “sweeten the deal” and improve your rate, talk to your lender about rate locks and discount points.
A mortgage rate lock is when your lender agrees to “lock in” the rate for you—usually for 30 to 60 days—to protect you from higher interest rates while you buy a home.
The terms of a bid lock are often more negotiable than the bid itself. Lenders will often only agree to a rate lock if you agree to a slightly higher rate, but you can often negotiate it down to an unblocked rate.
You can also request an additional 30 days to extend your search window, or even request a floating point position that allows you to take advantage of market rate cuts while still being protected from rate hikes.
Discount points, also known as mortgage points, are more of a collaboration/discussion than a negotiation. Essentially, they suggest that you pay your lender a portion of the interest you owe upfront to lower your overall interest rate.
For example, on a loan of $300,000, you can pay an additional $9,000 (3% of the loan amount = 3 points) to reduce your interest rate by 0.50%.
Over 30 years, that 0.5% difference will save you nearly $29,000 in interest, or $20,000 after your initial outlay. Even accounting for inflation, this is a good deal.
But, as you’ve probably figured out by now, in most cases, discounts only make sense if you plan to stay in the house for more than 10 years.
So instead of saying, “We’d like to get some nice, nice discounts,” ask your lender, “What discounts, if any, would make sense if we plan to stay in the house for XY years?”
Basically, ask your lender where your “break-even point” will be.
So, in summary, the four (actually five) steps required to negotiate the best rate are:
- Maximize your credit score.
- Reach out to at least three, ideally five, lenders.
- Make sure your lenders provide a “full service” offering underwriting, valuation and in-house financing.
- If your favorite lender didn’t offer the lowest number, ask if they’ll match it.
- Ask about bet locks and discount points.
Before we finish, I hope you will allow me to re-emphasize one previous point that is really important to this process:
Remember: The best lender is not necessarily the one with the lowest rate.
Let’s say you’ve narrowed down your choices to two options:
- Creditor A has a lower interest rate of 0.0625% and slightly lower fees, but it often takes your loan officer a day or two to respond and only works for three years.
- Lender B has a slightly higher interest rate and fees, but your loan officer always answers your calls 24/7, does everything on the spot, and you like her better.
In practical terms, working with Lender B will cost you $170 more and increase your monthly payment by $11 ($121 per year).
But she’s still the obvious choice.
Because the “surcharge” of $170 + $11 a month for having an experienced, fast lender is a bargain in this market – and if you’re like me, having a lender who picks up the phone at 11:38 p.m. on a Sunday night can have critical to accepting the offer.
Also, the old adage “You get what you pay for” certainly still applies to mortgages.
“The lowest trade can have the lowest service,” Mark says.
At the end of the day, negotiating your mortgage rate is really the last and, frankly, the least important step in getting the best possible combination of lender and rate.
As soon as you:
you’ve already done 95% of the work – and done due diligence to a much greater extent than the average borrower.
Accepting the lowest rate you can find to negotiate with your favorite lender is just an optional boss move.
Featured Image: Marina Pleshkun/Shutterstock.com