Strong Loan Applications Help You Negotiate Better Mortgage Interest Rates
This strategy might not be as helpful if youre close to closing on a mortgage loan. But if you have a little more time before you lock your rate, consider that a stronger application gives you some leverage to negotiate your mortgage rate.
Basically, the better your financial situation, the more lenders want your business. And the more theyre willing to negotiate to get it.
That could mean trying for a:
- Higher credit score: Take steps to raise your score before you apply. Good credit scores generally get lower rates
- Bigger down payment: A larger down payment often leads to a lower mortgage rate. Youll save even more if you can put 20% down and avoid private mortgage insurance
- Lower monthly debts: Paying off some debt from credit cards or other loans, before you apply, leads to a lower debt-to-income ratio and often a lower mortgage rate
Of course, raising your credit score, saving for a down payment, or paying off debts all take time.
But if you can wait a little while or, if your rates look worse than you thought, and you want to make a change before trying again these are good ways to score a significantly lower mortgage rate.
Maximise Your Discretionary Discounts
While many lenders dont offer transparent pricing, shopping around can be a time consuming and arduous task. If you dont want to haggle and pour through the various offers, fees and packages to determine whether you will actually be better off, you can use the services of an experienced mortgage broker to negotiate on your behalf and use pricing requests.
Mortgage brokers already have existing relationships with banks, and can assess the best deal for you. Banks are aware that mortgage brokers can make it easier for you to switch lenders so they are more likely to offer their best rate from the get-go than lose you as a client.
If youre doing it on your own, remember to weigh up the upfront and ongoing fees when calculating the best rate.
What Are Interest Rates
Interest rates are the way companies make money by lending money out. Its the money that you pay for the act of borrowing money. You pay interest rates any time you take out a loan or use a credit card. Rates are best understood in the form of APR. That stands for annual percentage rate.
Its good to use APR to understand interest rates because it takes fees into account as well as interest rates. That means youll get an accurate idea of how much youre actually paying for different financial products.
The APR tells you how much youll pay each year in interest. For example, if you borrow $1,000 at 10% APR, by the end of the year youll pay $100 in interest. This shows how understanding interest rates and using APR lets you see the actual cost you pay to borrow money.
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Know What It Means To Negotiate A Mortgage
If youre applying for a mortgage for the first time or renewing your current one, youll find posted mortgage rates advertised at financial institutions. You may not realize, however, that you can always get a better rate than the one posted, as long as you negotiate.
For example, if the posted five-year fixed rate is 3%, youd be able to negotiate the interest rate down a bit. Besides the interest rate, you can also negotiate some of the contract details, such as prepayment options and cash-back benefits. What youre able to get really comes down to your negotiating skills.
How Buydowns Are Structured
Since buydowns are negotiated, they can be arranged in a variety of ways. In addition to buydowns over the life of the loan, common structures that lenders use are the 3-2-1 buydown and the 2-1 buydown. However, regardless of the structure, the principles are the same.
The buyer, seller or builder will pay the lender the difference between the standard interest rate and the lowered rate through points at closing. The buyer will benefit from the reduced interest rate until the buydown expires, usually after a few years. Not all buydowns expire. If it does, the buyer will have to pay the standard interest rate for the remainder of the term, which will cause their monthly mortgage payments to increase.
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Getting Prescreened Mortgage Offers In The Mail
Why am I getting mailers and emails from other mortgage companies?
Your application for a mortgage may trigger competing offers . Heres how to stop getting prescreened offers.
But you may want to use them to compare loan terms and shop around.
Can I trust the offers I get in the mail?
Review offers carefully to make sure you know who youre dealing with even if these mailers might look like theyre from your mortgage company or a government agency. Not all mailers are prescreened offers. Some dishonest businesses use pictures of the Statue of Liberty or other government symbols or names to make you think their offer is from a government agency or program. If youre concerned about a mailer youve gotten, contact the government agency mentioned in the letter. Check USA.gov to find the legitimate contact information for federal government agencies and state government agencies.
Does a lender have to give me anything after I apply for a loan with them?
Under federal law, lenders and mortgage brokers must give you:
- this home loan toolkit booklet from the CFPB within three days of applying for a mortgage loan. The idea is to help protect you from unfair practices by lenders, brokers, and other service providers during the home-buying and loan process.
- a Loan Estimate three business days after the lender gets your loan application. This form has important information about the loan:
- the estimated interest rate
Get Help From A Housing Counselor
You can get help with modifying your mortgage for free from a Housing and Urban Development -approved housing counseling agency.
These are experts who have helped out hundreds of homeowners in similar circumstances. They have the expertise and knowledge to give you an honest assessment of your situation, outline your options and help ensure that if you do contact your mortgage servicer to seek a loan modification, your application doesnt get lost, said Sean Coffey, a former housing counselor who is now a media and development manager for California Reinvestment Coalition, a consumer advocacy group. To find a HUD-approved counselor, visit MakingHomeAffordable.gov.
Housing counselors can help you gather the documents and information you need to get a mortgage modification or assistance, Coffey said. They can tell you what your timeline looks like in terms of how quickly you need to act to avoid foreclosure. And they often have built relationships with people at banks or mortgage servicers, so they can advocate on your behalf.
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Bonus: Lock In Your Rate
Once youve found a great mortgage rate, consider locking it in. A mortgage rate lock is a guarantee from your lender that your interest rate wont rise for a specified period.
Since mortgage rates can change by the day and even the hour, a rate lock protects you from fluctuations in the market.
If you lock and then rates increase, you still get to keep your low mortgage rate. But the opposite is true, too. If rates drop, then you may miss out on the lower rate.
Check mortgage rates:
Why You Have To Shop To Negotiate Rates
Mortgages are a lot more regulated than they used to be. As a result, individual loan officers have less flexibility to change rates from customer to customer.
Thats why we talk about tactics like comparing loan estimates and purchasing discount points to lower your rate rather than trying to bargain with your loan officer.
In todays market, some lenders are more efficient than others. They lower operating costs by using online applications and digital processing. And those overhead savings often get passed on to customers.
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Other lenders do such high volume that they can afford to charge lower rates and fees, and still turn a profit.
And most every lender has some sort of niche. Some mortgage companies are friendlier toward lowincome or lowcredit borrowers, some are better for selfemployed people, some have jumbo loans for multimillion dollar homes, and so on.
So, shopping around doesnt just give you ammo for negotiating a lower mortgage rate.
It also helps you pinpoint mortgage lenders that specialize in the type of loan you need. And that lender will be more likely to give you a competitive rate, regardless.
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The Risks Of Not Comparing Mortgage Rates
It may seem like a lot of effort to shop around for a new lender, and the payoff may not seem worth it at first. However, not shopping around could leave you financially vulnerable. This vulnerability is due to something called interest rate riskâ. Interest rate risk occurs when your mortgage is expected to renew at a higher rate, putting more financial strain on your budget. According to the Bank of Canada, about 53% of households were subject to interest rate risk in 2018.
Interest rate risk occurs in three scenarios for homeowners in Canada:
- If you have a variable rate mortgage, rising interest rates affect you immediately
- If you have a fixed-rate mortgage coming up for renewal
- If you have a home equity line of credit with a variable interest rate
In these cases, renewing your mortgage at a higher rate could add hundreds of dollars to your monthly mortgage payment, as we saw in the example above. Whether you are choosing renewal vs refinance, the bottom line is the same: these hundreds of dollars could be the difference between paying down debt and just making ends meet. For this reason, itâs important to take the time to shop around for the best mortgage rate â your financial prosperity depends on it.
Why You Should Always Negotiate
A mortgage loan could be the biggest transaction youll ever make, so its important to keep your costs down when possible.
You should always try to negotiate down to a better rate doing so can potentially save you thousands of dollars in interest costs. While you may not always be able to find a lower rate, its also important that you compare multiple lenders before accepting a rate.
Credible makes comparing multiple lenders easy. You can see rates from our partner lenders and get pre-approved for a loan in just three minutes.
Credible makes getting a mortgage easy
- Instant streamlined pre-approval: It only takes 3 minutes to see if you qualify for an instant streamlined pre-approval letter, without affecting your credit.
- We keep your data private: Compare rates from multiple lenders without your data being sold or getting spammed.
- A modern approach to mortgages: Complete your mortgage online with bank integrations and automatic updates. Talk to a loan officer only if you want to.
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Use A Second Mortgage To Pay Off The First
One final trick some folks use to reduce their mortgage interest expense is opening a second mortgage to pay off the first.
This way they dont need to refinance, which can be a bit more involved than taking out a second.
Its basically a form of arbitrage where interest rates are lower on the second than the first for one reason or another.
For example, if the interest rate on your first mortgage is well above going rates today, it could make sense.
This can be done with either a fixed-rate home equity loan or adjustable-rate HELOC. But it takes a bit of tinkering and money management skills to get it done.
So in the end, you might just be better off refinancing your mortgage or sticking to some of the alternatives discussed above.
Ask About Loan Modification Programs
Aside from lowering your mortgage rate, your lender might offer loan modification programs, if your personal situation qualifies. Loan modification programs vary depending on the lender but may include options like extending your loan term or switching you from a variable-rate loan to a fixed-rate loan.
Youll likely need to provide proof of hardship to be eligible for a loan modification, but this path can help you weather tough financial times.
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When Your Current Rate Is Not Competitive
If you’re thinking about refinancing to a lower rate, it’s a good idea to speak with your current lender first. Most lenders would rather negotiate with you than lose your business, especially if you’re a good customer who makes her payments on time. The best ammunition you have is an improved loan-to-value ratio. This ratio represents the amount of the mortgage loan relative to the value of the home it’s basically a measure of how much equity you have in your home. If your home has increased in value significantly or you’ve paid down a good chunk of your mortgage, your ratio will be lower than it was when you bought the property. The lower the ratio, the better the rate you qualify for. The best rates usually go to homeowners with more than 20 percent equity in their homes.
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Look Into A Recast Instead Of A Refinance
Theres also the lesser-known loan recast, which like a refinance, can lower the monthly payments on your mortgage.
The difference is youre simply adjusting the amortization schedule of the loan.
Lets assume youve been paying extra each month to lower your outstanding balance, which is great for saving money long-term, but does nothing to lower subsequent monthly payments.
If you want your lower balance to be reflected in your remaining payments, you can request a recast from your lender or servicer, which will re-amortize the loan.
Then you should have lower monthly payments going forward, without a refinance or the closing costs that come with it. There may be a small recast fee though.
The beauty of the non-refinance route is that you also dont reset the clock on your mortgage. In other words, you dont extend the term with a fresh loan.
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The Bottom Line: Buydowns Can Save Buyers Cash
Generally speaking, mortgage buydowns enable buyers to lower their monthly mortgage payments either permanently or in the first few years of their loan. By paying discount points at closing, buyers can reduce their interest rates slightly, which can lead to long-term savings.
However, buydowns are not appropriate for all buyers. If youre interested in buying down your mortgage, you should calculate your breakeven point to ensure the amount of time it takes to recover the money spent on points is worth the upfront investment.
Alternatively, there are plenty of ways to get a better mortgage rate, which may save you even more money over time. If youre ready to move forward, you can apply online!
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Evenly Distributed Interest Rate Reductions
In some circumstances, a buyer may choose to purchase enough discount points to reduce their interest rate evenly over the life of the loan. By obtaining a buydown loan, the buyer pays an even larger sum upfront that prevents their interest rate and thus their monthly mortgage payments from ever increasing.
Using the same example as above, the buyer would be expected to pay a monthly mortgage payment of $2,147.29 for a zero-point loan, which is a loan without any discount points applied. If the buyer decides theyd rather buy down the mortgage and pay 4% interest throughout the loans term, their payments would look like this:
|
$2,851.50 |
Because the buyer would be lowering their interest payments for the entire life of the loan instead of just 2 or 3 years the total cost of the buydown would be higher. These buydowns usually cost around $16,000 – $20,000 and save buyers somewhere around $85,550 but they only make sense for buyers who intend to stay in the home for more than 5 years or so.
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Play The Loyalty Card
As already mentioned, use your loyalty as a bargaining chip if you must. Many borrowers stay with the same lender for years, and if you have a good history with them, it can help when it comes to negotiating a lower rate.
Prior to asking for a lower interest rate, review your position and check that you have been making your repayments on time and that your LVR (Loan to Value Ratio has gradually been getting lower.
With this, you now have a current timeline of your loyalty and proof of being a reliable customer. This can be very helpful.
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Ask About Discounts And Rebates
Did you ever go to buy a car and find out about rebates you didnt know existed? The same may be true with mortgage loans, as some lenders offer incentives to attract borrowers. These rebates can knock down various costs a few hundred dollars easy money for the time it takes you to ask. You never know what you may find.
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