Many people think that when you get a mortgage you simply accept the terms offered by the lender but that is not the case. You can negotiate loan terms like your interest rate and closing costs to get the best mortgage possible. This is especially important with mortgages because so much money is involved. Improving your loan terms by even a small amount can save you thousands of dollars upfront and in the long run. For example, with a 30 year mortgage you make 360 payments so saving as little as $10 a month adds up to over $3,500 over the course of your loan -- that is a lot of money.
People are less likely to negotiate their mortgage for several reasons. First, the process can be confusing and overwhelming. There are a lot of terms that you are seeing for the first time which can seem like a foreign language. Second, you do not get a mortgage very often so you may not be familiar with the process. You may only get one or two mortgages over the course of your life. Finally, you are usually under time pressure to close your mortgage so you may not think you have time to negotiate. You may be in a rush to buy a home or lock in the terms on your refinance and haggling with lenders is the last thing you want to do. So there are a lot of factors that seem to be working against borrowers negotiating with lenders, but not if you understand how to do it.
Simply put, negotiating a mortgage is similar to any other major purchase like buying a car or even a television. There may be more terminology and paperwork involved but the process works the same. You shop multiple lenders, review prices or quotes in this case, negotiate loan terms and then select your lender and mortgage. In some ways, it may be easier to negotiate a mortgage than a car or a television because there are more items involved. While it may be difficult to get a car dealer to lower the price of a car or a retailer to discount a television, you may be able to get a lender to lower a mortgage rate, closing costs or both. Believe it or not, a lender may actually have more room to maneuver than a car salesperson or certainly than a salesperson in a store.
Additionally, there are certain regulations in place that are designed to promote shopping for a mortgage. Lenders are required to provide documents, for free, that make it easier to compare loan terms. The documents are the same for all lenders so you can review them side-by-side. You can use this information to better understand specific closing costs and potentially negotiate individual fee items. The more information you have, the stronger your position is with lenders. For example, you can get lenders to match a lower mortgage rate or lender fee which can save you a lot of money.
So there really is no reason to not shop lenders but plenty of upside for borrowers. Below we outline how to negotiate the best mortgage. Following these steps can help you save money and find the lender and mortgage that are right for you.
Like with all significant purchases, it makes sense to comparison shop when you get a mortgage. When borrowers select a lender without comparing shopping they could end up paying thousands of dollars more in interest expense or closing costs than they should. There are different types of lenders such as banks, mortgage brokers, mortgage bankers and credit unions and they are ALL competing for your mortgage business. You should treat the mortgage process like you would any other major purchase, such as buying a car -- shop around, compare mortgage proposals from multiple lenders and negotiate the best terms for your mortgage.
Although the mortgage process can be complicated and overwhelming, you are really focused on only two items when comparing mortgage proposals: the mortgage rate and closing costs. You can use lender competition to your advantage by potentially negotiating a lower interest rate or reduced closing costs. We recommend that you gather proposals from at least five lenders, including one mortgage broker, to make sure that you are getting the loan with the lowest interest rate and fees. Comparing at least five quotes ensures that you have a range of mortgage options, which puts you in a stronger position to negotiate.
It takes extra time to compare lender proposals but spending an extra hour or two shopping your mortgage business can save you thousands of dollars over the life of your loan. For example, on a $300,000 30 year fixed rate mortgage, reducing your interest rate by just .125% will save you almost $8,000 in interest expense. The table below shows mortgage rates and closing costs for lenders near you. Contact multiple lenders to shop for your mortgage.
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When you contact lenders you should request that they provide a Loan Estimate, which is a standard document that outlines the key terms of the mortgage including interest rate and closing costs. Lenders are required by law to provide a Loan Estimate within three business days of a borrower submitting a loan application but most lenders provide one without requiring an application. If a lender refuses to provide a Loan Estimate, this is a red flag and you should contact other lenders.
The Loan Estimate is a standard document that is the same for all lenders which allows you to more easily compare mortgage proposals. When reviewing the document, the key figures to focus on are 1) interest rate (top of page one); 2) Estimated Closing Costs: fees charged by the lender and third parties to process your mortgage (bottom of page one); and, 3) Annual Percentage Rate (APR): the APR represents what your interest rate would be if it included all up-front lender and closing costs so it is a way to use one figure to compare both the interest rate and closing costs for a mortgage. If the APR is much higher than your interest rate then you know that the closing costs are high and you may want to negotiate lower costs or change lenders (top of page three)
Review How to Use a Loan Estimate
It is important to highlight that just because you receive a Loan Estimate from a lender does not mean you are obligated to work with that lender. You are using information from the document to review and compare mortgage proposals. Additionally, a lender cannot charge you to provide a Loan Estimate or submit a loan application.
We also recommend that you also request the Lender Fees Worksheet. The Lender Fees Worksheet provides a breakdown of the upfront closing costs and expenses associated with a mortgage. The Loan Estimate also provides a detailed breakdown of mortgage costs but the two documents may contain different information so it can be helpful to review both when selecting a lender for your mortgage. By law, the lender is not required to provide you with a Lender Fees Worksheet, but will likely provide it to you if you ask.
You can use the Lender Fees Worksheet to perform a thorough review of closing costs and to compare costs across different lender proposals. For example, one lender may charge an appraisal fee of $600 while another lender may only charge $500. You can use the information you gather to negotiate specific cost items and reduce your overall mortgage closing costs.
After you have gathered the Loan Estimate and Lender Fees Worksheet from the lenders you contact you can compare mortgage rates and closing costs presented in the proposals. Some lenders may offer a lower interest rate with higher costs while other lenders may offer a higher rate with lower costs. Use this information to your advantage to negotiate the lowest mortgage rate and fees for your loan by seeing if a lender is willing to match the rate or fees offered by another lender. In some cases lenders are willing to improve their loan terms and in other cases lenders may not be willing to change their proposal but you create competition for your mortgage business by asking.
Understand How to Compare Mortgage Proposals
When you compare mortgage proposals keep in mind that interest rates and closing costs vary by mortgage program. For example, a fixed rate mortgage typically has a higher interest rate than an adjustable rate mortgage. In some cases borrowers review different types of loans as part of their selection process so be sure you are comparing similar mortgage programs when selecting your lender.
Use ourMORTGAGE COMPARISON CALCULATORto compare rates and costs for different loans
When you shop lenders, be sure to ask them if their mortgage terms assume that you pay discount points. Some lenders advertise or show a low rate on their web site that includes one or more discount points. You usually only learn this information if you read the fine print for the loan terms, which is not always easy to find.
If you do not know a mortgage quote includes discount points you may think you are getting a low rate but not realize you are paying much higher closing costs. Each discount point equals 1% of your loan amount so if the lenders assumes you pay multiple points, the cost can be significant. It is important to highlight that paying discount points is totally optional and up to you, the borrower. This is why it is a bit sneaky when lenders assume you pay points.
To avoid any unnecessary surprises -- and to make sure you have enough funds to close your loan -- ask the lender if their terms include points or make sure to read the fine print. If the lenders assumes you pay discount points see if you can find another lender that offers the same low rate without the points. This approach reduces your costs and makes your mortgage more affordable.
Use ourDISCOUNT POINT CALCULATORto compare mortgages with different points, closing costs and rates
Some lenders may offer you a discount on your mortgage rate if you have a savings or checking account with them. In some cases, to qualify for the rate discount you are required to have a minimum account balance when you apply for the loan. The minimum balance can be $5,000 or much greater depending on the lender. The amount of the mortgage rate discount can range from .125% to .500% and potentially higher and typically varies depending on your account balance, with the more money you have in your account, the greater the discount.
When you contact lenders about getting a mortgage, be sure to ask them if they offer an interest rate discount if you open a checking or savings account. It may make sense for you to open an account with the lender or add additional funds to an account with your existing bank to lower your rate. You can always close the account or withdraw your money in the future but you will benefit from paying a lower mortgage rate for the entirety of your loan.
Another way to lower your costs if you are getting a home purchase mortgage is to have the property seller pay for part or all of the costs.
Understand Ways to Lower Mortgage Closing Costs
In addition to selecting the loan with the lowest interest rate and closing costs, it is important to select the mortgage that is right for you. That means selecting a loan amount that you can afford and the mortgage program and length that are right for you.
When it comes to mortgage size, just because a lender is willing to offer you a certain mortgage amount does not mean that you will be comfortable with that mortgage. Make sure you can afford your total monthly housing expense which includes your monthly mortgage payment plus property taxes and homeowners insurance as well as other potentially applicable costs such as homeowners association (HOA) fees, private mortgage insurance (PMI) or FHA mortgage insurance premium (MIP) -- so the all-in cost of owning a home. Additionally, you should consider the cost for maintenance of the property.
Loan program is another important consideration when selecting the mortgage that is right for you. There are different types of mortgage programs and each has pros and cons. A fixed rate mortgage is typically best for a conservative borrower while and adjustable rate mortgage (ARM) or interest only loan (IO ARM) may be better for people with a higher tolerance for risk who are looking for a lower monthly payment or higher loan amount. Understand the advantages and risks of each type of program before selecting your mortgage.
Review What Mortgage Program is Right for Me?
Finally, choosing the proper loan length is key to selecting the right mortgage. The most common length of mortgage is 30 years but you can lower your interest rate and total interest expense by selecting a shorter term such as a 15 year loan. The downside of a mortgage with a shorter term is that the monthly payment is higher (because you are paying back the loan over a shorter period of time) which means you can afford a smaller loan amount.
Understanding the pros and cons of your options when it comes to loan size, type and length and working with a lender who understands your personal and financial objectives enables you to select the mortgage that is right for you.
“Fine-tune your loan offers.” CFPB. Consumer Financial Protection Bureau, 2019. Web.