Negotiating the Lowest Mortgage Interest Rates
With interest rates on the rise, you may be wondering whether it’s time to move quickly on buying that new home you’ve been considering for the past several years. Interest rates remain lower than the 6 percent of 10 years ago, but they’ve gone up steadily throughout 2018, with 30-year fixed mortgage rates hovering around 4.5 percent since May.
Experts say that trend will likely continue, so now may be an advantageous moment to buy if you’ve had your eye on the market for a while. According to a recent LendingTree Mortgage Rate Competition Index report, borrowers who took out a $300,000 loan in mid-August will save an average of $28,315 over the life of the loan, a $1,000 jump over the week before and $7,000 more than those who took out a mortgage at the same time last year.
The index, or spread, between the most and least competitive rates has expanded, which is good news if you’re in the market for a new home. A broader range in rates indicates that mortgage lenders have flexibility in what they offer. That means you can likely negotiate to ensure that you’re getting the best possible deal in terms of interest rates and overall costs.
But exactly how do you do that? We give you the tools for negotiating the best possible rate for your mortgage.
Steps to negotiating the lowest mortgage rate
Strengthen your negotiating position
Before you approach lenders to discuss interest rates, you want to make sure your financial house is in order. Several factors contribute to the rate you’ll receive on a mortgage offer, most of which are within your control. “The stronger your position, the better off you are [because] you can shop,” said Brian Walther, a Georgia-based mortgage loan officer with First Tech Federal Credit Union.
The key areas to shore up include:
Credit score: Different mortgage programs require different credit thresholds, so find out the range needed for the type of loan you want. If your score is lower than necessary, you can consider other options or work on boosting your score. Paying down your existing debt and avoiding opening new accounts will move you closer to the number you need to qualify.
“If you’re a year out from buying a home and you were credit card churning the previous year, it might make sense not to open as many credit accounts because it could have a negative impact on your credit score,” said Roger Ma, a licensed real estate agent and CFP at lifelaidout in New York City.
Debt-to-income ratio: Your debt-to-income (DTI) ratio is the amount of your total debts divided by your gross monthly income. Ma noted that most lenders look for a DTI of 43 percent or below after you take out the loan. Paying off some of your debts before starting the mortgage process could yield better offers.
Down payment: Generally speaking, the more money you put down on a house, the better interest rate you’ll receive. If you’re considering a low-down-payment program, bear in mind that you may have a higher interest rate and will likely spend more money long term than if you pay more upfront. “If you can get that 20 percent down, you’re certainly going to have a more favorable price than, for example, 5 or 10 percent down,” said Ann Thompson, the divisional executive for Northern California at Bank of America.
Movable assets: Make a list of any movable financial assets you hold, such as a 401(k) you can roll over from a previous employer, a cash-based money market account or a large amount of cash savings. If you’re applying for a mortgage through a bank and are willing to move those assets over to that company, you may be able to negotiate lower fees and even point reductions on your rate, Thompson said.
Organizing these elements before you begin shopping for a mortgage may increase the chances of securing a favorable deal and are a good practice regardless of the rate environment.
You may also want to gauge your potential borrowing power before scheduling appointments with lenders. LendingTree’s Mortgage Calculator tool allows you to estimate your monthly payments including principal and interest, homeowners insurance, private mortgage insurance and taxes. If you have a particular listing or area in mind, you can input the ZIP code and price, along with your expected down payment, credit score range and other relevant details to see not only your potential principal but the interest and total cost of the loan. You’ll also see a breakdown of the monthly payments so that you’ll know what you can expect in terms of taxes and other factors.
Bank on your relationships
Meeting with several lenders and comparing offers is wise, as you want to make sure you’re getting not just a good rate but that you’re also receiving a favorable price on closing costs and other fees associated with the mortgage. But Thompson recommends starting the process where you already have a relationship.
“The first place you should go is to your bank where you have a relationship and see what they will offer in terms of any kind of a discount rewards program,” she said.
Depending on the extent of your business with the organization, you may be eligible for fee reductions or a points reduction that allows you to buy down your rate. “Those two combined can be very powerful,” Thompson said.
Ma said borrowers may see .25 percent or .05 percent taken off their rates based on the extent of their existing relationships, though he noted that the programs vary from bank to bank.
Thompson also suggests asking the bank about additional benefits it offers if you’re willing to bring in new money during the course of the loan. For instance, a borrower who is willing to bring a large sum ― usually $250,000 or more, according to Thompson — over to the lending bank may be eligible for further fee and rate reductions.
This is also where your movable assets may come in handy. If you opened a 401(k) through a previous employer but have since left that company, you may be able to move that account over to the lending bank. There might also be options for moving over a stock or mutual fund portfolio. The prospect of you bringing more of your business to that bank could give you an edge during your negotiations, and Thompson said borrowers are often unaware that they have this leveraging tool.
“Their assets — whether they are cash assets or investment assets, equities, bonds — these are portable, and they’re also valuable when you are negotiating for a lower rate,” she said.
Beyond discussing lower rate incentives, Ma recommends asking different banks about their closing costs and whether there are other steps they can take to reduce their rates, such as enrolling in auto-debit programs that qualify them for better deals.
Consider going bigger
Though it may seem counterintuitive, there may be circumstances in which applying for a larger loan could help you get a lower interest rate. Ma said borrowers who are taking out large loans — something in the $400,000 range, for instance — might consider increasing their ask slightly into the jumbo loan category.
Jumbo loans fall outside the limits established by Fannie Mae and Freddie Mac and are therefore not backed by the government, so you’d have to borrow exclusively from private lenders. But there are advantages to this, Ma said.
“Typically, banks are a little more rigid with their rates and process for nonjumbo loans,” he said. “For the jumbo loans, they typically hold those loans on balance sheets so they might be able to have more flexibility in giving you a lower rate.”
Ma said he’s observed that rates on jumbo loans “have consistently been better for the past four years from a rate perspective.” If you’re thinking about taking out a loan that’s just on the cusp of the jumbo mortgage threshold, you may receive a lower interest rate by expanding your price range, he said.
Explore all the different products available to make sure you’re choosing your mortgage structure strategically. Walther said many first-time homebuyers overlook options such as buying down their rates or taking out adjustable-rate mortgages (ARMs) that could save them money if used strategically.
“I do a lot of adjustable-rate mortgages because the rate is better and it saves them so much money,” Walther said. “Everybody seems to be afraid of that term, adjustable rate, but it sticks for a certain amount of time. The average life of a mortgage is maybe seven years, so a 7/1 ARM is not a bad option.”
A 7/1 ARM is a type of hybrid mortgage in which you receive a lower, fixed interest rate for the first seven years of the loan, after which the rate will adjust yearly based on your loan terms and specified rate caps.
Walther noted that if you intend to be in a house long term, he wouldn’t recommend an ARM. But if you plan to move and sell the home within a few years, you may be able to get a lower rate for the introductory period than you would with a fixed-rate mortgage. This could lead to substantial savings, Walther said, even if you are still in the house when the adjustable rate period begins and you need to refinance at that time.
Lock in your rate
Once you’ve found a lender with whom you’d like to work, ask about the specifics of the terms and how long your interest rate is locked in during your escrow period. Thompson said, generally speaking, escrows are usually locked in for 30 to 45 days after you’ve settled on a rate.
“But if that rate expires and they’re not finished underwriting your loan, how long is that rate good for?” she asked. That information will be included in your loan disclosures, but Thompson advised having that conversation early and to find out whether you’ll have to pay for a rate lock extension.
Do your own research
Sourcing recommendations for lenders from family and friends can be useful when you’re researching your options, but their reviews shouldn’t be the beginning and end of your mortgage search.
“It’s important to ask people, ‘What’s your experience?’ or ‘Do you have a good lender?’” Thompson said. “But don’t go exclusively on what your friends say because you don’t know if they got the best deal. It may sound like one thing and be another.”
She emphasized that while doing online research can be useful, it’s important to meet with lenders face to face to discuss your situation and what they can offer you. Your circumstances may differ significantly from that of your friends or relatives, and a program that worked well for them might not match your goals or needs. Their recommendations can be a good jumping-off point, but you should do your own research and conduct your own meetings to get a sense of where you’ll find the most competitive deal. And while online sites can provide some perspective, she said your mortgage deal will ultimately come down to your financial circumstances, and speaking directly with a variety of lenders can help you get the best rates.
Once you’ve shopped around, look at what your bank offers and what their competitors are offering. Thompson recommends taking those numbers back to your bank to see whether they’ll present a better deal in light of their competitors’ rates.
Why negotiating matters
Even a relatively small increase in your interest rate can significantly impact the overall cost of the loan. In the following example using LendingTree’s Mortgage Calculator, you’ll see that while the monthly payments don’t appear to increase drastically, the total cost of a $200,000 mortgage increases by more than $10,000:
|Interest savings over life of loan|
|Principal||Interest rate||Monthly Payment||Total*|
*Total cost of a $200,000 30-year fixed-rate mortgage excluding fees such as closing costs, mortgage insurance, property taxes, homeowners’ association fees and other related expenses
The contrast is even more stark on a larger loan. With a $400,000 loan, your costs would increase by more than $21,500 with a slightly higher interest rate:
|Interest savings over life of loan|
|Principal||Interest Rate||Monthly Payment||Total*|
*Total cost of a $400,000 30-year fixed-rate mortgage excluding fees such as closing costs, mortgage insurance, property taxes, homeowners’ association fees and other related expenses
The bottom line
Whether you’re buying your first home or your third, taking out a mortgage is a significant financial decision. For most people, as Thompson described it, their mortgages are their biggest assets and their biggest liabilities. That’s why you want to feel confident in the terms of your loan and in the lender with whom you work. By taking the time to improve your financial foundation and compare a variety of offers, you can come to negotiations empowered to get the best rate available to you.