A low mortgage rate can save you thousands of dollars over 30 years (the most common mortgage repayment term). Fortunately, you can do a lot to ensure you get the best rate available to you.
Why you should negotiate mortgage rates?
Negotiation is a great tool to help you save money on your mortgage rate. Different lenders may offer you different interest rates and fee structures, which is why it's so important to get multiple quotes before deciding where to apply for a loan. Additionally, certain fees are negotiable, and getting them reduced or waived can bring your monthly costs down even further.
Whether you’re a first-time homebuyer or a seasoned borrower, negotiating mortgage rates requires some planning. These eight tips can give you some leverage when navigating the negotiation process.
1. Decide what type of mortgage you want
Generally, you can choose from five types of mortgages. Each type is a bit different, so not every option on the market will be appropriate for you. Knowing what kind of mortgage you want can help you avoid paying more for a loan than you need to.
Here are the five common types of mortgages:
- Conventional mortgages — Conventional loans typically offer some of the best interest rates on the market. They’re usually the best fit for borrowers with good credit, strong financial profiles, and stable employment histories.
- Government-backed loans — Qualifying for a government-backed loan is generally easier than qualifying for a conventional mortgage. The government agency backing the loan agrees to protect the lender from a loss if the borrower defaults. In exchange, lenders are willing to approve a wider range of borrowers. Government-backed loans include FHA, VA, and USDA mortgages.
- Fixed-rate mortgages — As the name suggests, fixed-rate mortgages maintain the same interest rate for the entire length of the loan, allowing you to benefit from predictable monthly payments.
- Adjustable-rate mortgages — In contrast, adjustable-rate mortgages will change after an initial period, adjusting according to current market rates and your loan agreement. These variable-rate mortgages often appear attractive to borrowers because they offer a lower introductory interest rate. But your interest rate and costs can increase significantly over time.
- Jumbo loans — Jumbo loans are larger than the current conforming loan limit. In 2021, the limit was $548,250 for most areas and increased to $822,375 for certain high-cost areas.
Your overall financial situation and your credit score are two important factors in determining the interest rate you’ll be offered when you apply for a loan. Generally, borrowers who are stronger in both these areas tend to be offered the best mortgage rates, and have an easier time qualifying for a loan.
If you’re unsure of what you can qualify for, it’s worth taking the time to find out. Getting pre-approved through a platform like Credible can help you understand how much mortgage you might be eligible for.
3. Improve your credit utilization and DTI ratios
Lenders consider your debt-to-income ratio, or DTI, and credit score when making lending decisions. Improving both before you apply for a mortgage can work in your favor.
DTI ratio is a measure of how much of your total monthly income goes toward paying debts. To calculate your DTI ratio, add your monthly debt payments and divide by your gross monthly income. Lenders typically look for your DTI ratio to be as low as possible. You can lower it by making an effort to pay down your debts or pay them off entirely. You can also improve your DTI ratio by increasing your total income by starting a side hustle or getting a second job.
On the other hand, your credit score indicates to a lender how likely you are to repay your debts. You can improve your score by consistently making payments on time, paying as far above the minimum payment amount as possible, and keeping your credit usage low.
4. Compare rates from multiple lenders
After your finances are in the best shape possible, the next step is to compare rates from multiple lenders. Comparison shopping can help you save big. Getting just one additional rate quote when mortgage shopping can save you $1,500, according to a 2018 study by Freddie Mac, one of the largest buyers of residential mortgages in the country. Obtaining five quotes can potentially result in a savings of $3,000.
You can visit different lenders’ websites and request a quote from each, or you can use a resource like Credible to help you gather multiple quotes in one place. Whichever method you choose, be sure to provide each lender with the same information. That way, once you have the quotes in hand, you’ll be able to make an apples-to-apples comparison between each offering.
5. Consider total loan costs
While the interest rate you’re given is important, it isn’t the only thing to consider when trying to save money on your mortgage. You also have to consider the total loan costs, including any fees associated with closing on your home loan. While you’ll pay many of those fees upfront when you close on your new home, others can be rolled into your loan amount, which can raise your monthly payment and increase the amount you pay overall.
That said, some of these fees, particularly any administrative fees charged by the lender, may be negotiable. For example, you may be able to get the lender to waive its application fees or reduce its loan origination fee. But other fees aren’t up for discussion. An appraisal fee, for example, is often set by the appraisal company itself rather than the lender, and often can’t be negotiated.
6. Consider discount points
Discount points are fees that you pay to the lender at closing in exchange for a lower mortgage rate. Reducing your interest rate by one point will typically cost you a fee equal to 1% of your loan amount.
But it’s worth noting that buying discount points does come with advantages and disadvantages that you’ll want to consider.
Pros of discount points
- Lower interest rate — Credit score aside, buying points is a way to ensure that you’re given a great interest rate. That decision can save you a lot of money on interest costs over the life of the loan.
- Lower monthly payment — Your interest rate helps determine your monthly payment. The lower your rate, the lower your monthly payment.
- Tax deductible — If you itemize deductions on your tax return and meet all other requirements for taking a mortgage interest deduction, you may be able to write off money you spend on discount points.
Cons of discount points
- Bigger closing costs — Buying discount points means you’ll need to be prepared to pay a significant amount upfront. If you don’t have the money or you’re taking it from another source like your down payment, it may not be worth it.
- Longer time to break even — If you put more money into the upfront costs of your loan, it means that you’ll need to plan on staying in the home longer to break even on those costs and truly see the benefit of savings from your lower interest rate.
- Not always worth the cost — If interest rates are low when you’re ready to buy a home, it may not be worth spending the money on points, since financing is likely already fairly affordable.
7. Request a rate match
In the mortgage industry, requesting a rate match involves asking one lender to match the interest rate that another lender offered you. This move doesn’t always work. But it can be a valuable tactic to have at your disposal if you live in an area where mortgage lenders have to compete for business.
Asking for a rate match is often easier if you have proof of the lower rate that you’ve been offered. When you go to the other lender to ask for the match, be sure to bring your quotes along with you. That way, the lender will be able to verify that the competition is offering you a better rate and may feel more inclined to make up the difference.
8. Make a bigger down payment
In the past, putting 20% down was the gold standard when taking out a mortgage. These days, many borrowers will be able to get a mortgage with a down payment of just 3% to 5%. Still, if you can afford it, making a larger down payment can help you secure a lower monthly payment by reducing your total loan balance, and it can make it easier to negotiate with your lender.
Generally, lenders want to loan to borrowers they believe will be more likely to repay their loans. If you put 20% — or more — down, you’ll have substantial instant equity in your new home. And lenders will perceive you as less at risk of default.