With mortgage rates having doubled since last year, you might be wondering: can I negotiate a better mortgage rate with my lender?
It almost seems crazy to reply to a bank and say, “How about I give ya 5.75%” — but I’m here to tell you it’s actually possible.
Under the right circumstances you can negotiate a better mortgage rate — and if you tinker with our Simple Mortgage Calculator, you’ll see that lowering your interest rate on a 30-year loan by just 0.25% can save you around $50 a month (or $600 a year) on your home payments.
So, how can you pull off a successful negotiation? What should you say to your lender? And how do you position yourself to effectively negotiate in the first place?
Let’s investigate 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 lenders even entertain negotiations, or will they look at you funny, like you’re trying to negotiate the price of milk at Publix?
Mortgage lenders will still negotiate rates in 2022, but you should know that their flexibility to come back with better numbers has gone down a bit thanks to TRID.
TRID, or the TILA-RESPA Integrated Disclosures, is a set of rules introduced by the Consumer Finance Protection Bureau in the fallout of the 2008 mortgage crisis. Implemented in 2015, TRID dictates what numbers lenders have to disclose upfront (principal, interest rate, closing costs, etc.) and also restricts how much those numbers can change during the preapproval process.
TRID is a good thing; the transparency it brought killed off price gouging and hidden fees — which is why the FTC is considering introducing TRID-like rules for car dealerships.
But it also meant lenders were forced to adopt more of a “what you see is what you get” mindset to your loan estimate.
They may still budge — and I’ll show you how — but I just wanted to set expectations that you won’t slash off 2% or anything crazy.
But 0.125% is definitely possible. Here’s how:
4 Steps to Negotiating a Better Mortgage Rate
1. Boost Your Credit Score Before Applying
Lenders are significantly more likely to try to win your business if you fit their “ideal borrower profile.”
Basically, they’ll give you the best rate — and possibly go even lower — if your credit score is the shiz.
Therefore, boosting your credit score should always be a chief 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 to Multiple Lenders
Next, applying to at least three lenders — ideally five — will help you identify who’s got the lowest rate. And then negotiate with the other lenders from there.
Getting multiple offers on a home loan may sound obvious, but according to Freddie Mac data, half of all home shoppers only apply to a single lender. Those who apply to just one extra lender end up saving $1,500 over the course of the loan, and those who apply to five save $3,000.
But before you go rate shopping, consider this: not all lenders are created equal.
“You’ll want to ensure you’re comparing apples to apples,” says Mark Milam, Founder of Highland Mortgage.
Ask the lenders you’re vetting if they control the A-to-Z process. Specifically, do they control:
If a lender outsources their appraisal process to a third party who’s backed up for a month — or their funding to Wells Fargo, who processes 3,000 requests a day — either of these hidden delays could cost you the contract on the house.
“In this crazy competitive market, sellers won’t wait,” says Mark.
3. Be Transparent With Your Favorite Lender(s)
To build on the previous point, the best lender isn’t necessarily the one with the lowest possible rate right out of the gate.
Rather, it’s the one who’s trustworthy, experienced, communicates well, and likes working with first-time homebuyers. Because again, those traits are more essential to closing the deal with the seller on time.
And they also can’t be negotiated for.
So as you vet potential lenders, pay careful attention to which ones you like and trust the most. Once you’ve identified the one or two that you’d trust to handle your home contract, just have a transparent conversation with them.
Say that you want to work with them, but that you’ve found a better rate elsewhere and are hoping they can match it.
Thanks to TRID, the gap between your loan estimates shouldn’t be that big. Your preferred lender may be able to waive some origination fees or crunch some numbers to get you closer to where you’d like to be.
But just be open and honest. The relationship is just as important as the rate.
4. Ask About Rate Locks and Discount Points
Finally, to potentially “sweeten the deal” and massage your rate, talk to your lender about rate locks and discount points.
Mortgage rate locks are when your lender agrees to “lock in” a rate for you — usually for between 30 and 60 days — to protect you from rising interest rates while you shop for homes.
The terms of a rate lock are often more negotiable than the rate itself. Lenders will often agree to a rate lock only if you agree to a slightly higher rate, but you can often negotiate it back down to the non-locked rate.
You can also ask for an extra 30 days to extend your search window, or even request a float-down provision which allows you to take advantage of lowering market rates — while still staying protected against rising rates.
Discount points, aka mortgage points, are more of a collaboration/discussion than a negotiation. Basically, they involve you paying your lender a chunk of the interest you’ll owe upfront in order to lower your overall interest rate.
For example, on a $300,000 loan you might pay $9,000 extra upfront (3% of the loan amount = 3 points) in order to lower your interest rate by 0.50%.
Over the course of 30 years, that 0.50% difference will save you nearly $29,000 on interest, or $20,000 net of your upfront cost. Even when you factor in inflation, that’s a good deal.
But as you probably picked out, most of the time discount points only make sense if you plan to stay in the house for longer than 10 years.
So, rather than say, “We’d like some sweet, sweet discount points,” ask your lender, “What discount points, if any, would make sense if we plan to stay in the house for XY years?”
Essentially, ask your lender where your “break even point” will be.
So, to recap, the four (well, really five) steps involved in negotiating the best rate are:
- Maximize your credit score.
- Apply to at least three, ideally five lenders.
- Ensure your lenders are “full service” offering underwriting, appraisals, and funding in-house.
- If your favorite lender didn’t offer the lowest number, ask if they’ll match it.
- Ask about rate locks and discount points.
Before we wrap up, I hope you indulge me in re-emphasizing one earlier point that’s really critical to this process:
Remember: The Best Lender Isn’t Necessarily the One With the Lowest Rate
Let’s say you’ve narrowed it down to two options:
- Lender A has a 0.0625% lower interest rate and slightly lower fees, but your loan officer often takes a day or two to respond, and has only been in the job 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 in-house, and you just like her better.
In practical terms, going with Lender B costs $170 more in fees and would raise your monthly payment by $11 ($121 per year).
But she’s still the obvious choice.
Because a $170 + $11/month “surcharge” for having an experienced, fast-moving lender is a deal in this market — and if you’re like me, having a lender who will pick up the phone at 11:38 PM on a Sunday night could make all the difference in getting an offer accepted.
Plus, the old adage, “You get what you pay for,” definitely still applies to mortgages.
“The rock bottom deal could have rock bottom service,” says Mark.
The Bottom Line
At the end of the day, negotiating your mortgage rate is actually the last, and honestly least important step in getting the best possible lender/rate combo.
- Determined how much house you can afford,
- Browsed the 7 Best Mortgage Lenders for First-Time Homebuyers (and don’t leave out your local, fast-moving boutique lenders), and
- Gotten between three and five quotes,
you’ve already done 95% of the work — and done way more due diligence than the average borrower.
Taking the lowest rate you find to your favorite lender to negotiate is just an optional boss move.
Featured image: Maryna Pleshkun/Shutterstock.com