About Rate Negotiation

understanding rates and how best to negotiate best rate and terms

Rate and points are negotiable if you are an applicant that has leverage. What we mean is that you have a strong credit score and excellent ratios. The key to rate negotiation is to shop around. Once lenders know that they are in competitive position for your business, you are in the position to negotiate rates.

Below are four (4) quick summary notes on rate negotiation

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about rate negotiation

Rate Negotiation Steps

To get the best rate, you must negotiate your rate down using the following steps. Note that published APR rates can vary from the actual rate that has been quoted due to factors that consider your credit rating, income ratios, type mortgage loan, mortgage qualifications and location.

  • First step, check your credit rating:
    the higher your credit score (FICO 720 and up), the stronger your position to negotiate rate. If your credit rating is below FICO 700, you might consider steps to strengthen your credit score.
  • Analyze your housing and debt ratios:
    again, if your ratios are within lending parameters (28/36), you are in a strong position to negotiate rate and terms — click here to calculate ratios

    you might consider paying off your debts, closing credit card and retail charge accounts that are not in use, and consolidate big ticket items into a low, repayment plan prior to submitting an application.
  • Understand the mortgage lending business:
    knowledge is power. Know how the lending business works so that you can understand terms that may be thrown at you. Use our guides to review the process and loan options.
  • When ready, submit your application:
    allow our network of financial advisors to compete for your business - get up to 4 lender quotes from lenders and mortgage brokers.
  • Collect and analyze lending offers:
    use this loan comparison worksheet (FREE download) to compare rates and terms among the lenders that have reviewed your application.
  • Compare programs:
    compare these lender rates and terms with other published rates referenced on this page.
  • Start negotiations:
    you are now in the position to negotiate with your lender of choice to match or beat any rate that you feel you deserve. Notify the lender that you have shopped programs and if they want your business, they must meet other competitive offers.

about rate negotiation

How To Determine Rates

LTV stands for: Loan-to-Value

Banks and other lenders will extend you credit based upon a percentage of the estimated market value of your home.

That percentage of market value minus the amount you owe on your first mortgage (plus any 2nd or 3rd mortgages that you may have) becomes the maximum amount of credit that lenders will give you.

For example:
Let's say that your home has an estimated market value of $250,000. The amount that you still owe on your first mortgage and any other liens is $100,000. The maximum amount you can borrow is calculated as follows:

Market Value: $250,000 $250,000
Percentage LTV: 70% 80%
Percentage of Value: $175,000 $200,000
Less Mortgage Debt: $100,000 $100,000
Equals Total Equity: $75,000 $100,000

Banks and other lenders generally charge a higher rate of interest for higher percentages of LTV. That is why you will find in the market quoted rates of PRIME + 0% for LTV percentages of 80% or lower.

To get the best rate, keep your loan request at 80%LTV or lower: calculate your own LTV borrowing amount.

about rate negotiation

Understanding Equity Line Rates

Most lenders use the PRIME RATE as a index when calculating home equity line of credit rates. They will then add a margin to the index to come up with the rate that they will charge for your home equity product.

For example:

PRIME + 0.00%

This quoted rate means that the lender will charge you the index (PRIME RATE) plus a margin of 0.00%.

Your interest rate will then be: The PRIME RATE

If you see this rate quote:

PRIME + 1.5%

The lender will charge you the index (PRIME RATE) plus a margin of 1.50%.

Your interest rate will then be: PRIME RATE + 1.50%

If you see the rate quote:

PRIME - 0.5%

The lender will charge you the index (PRIME RATE) minus a margin of 0.50%.

Your interest rate will then be: PRIME RATE - 0.50%

Since rates for home equity lines fluctuate — meaning that whenever the PRIME RATE increases or decreases — your interest rate will likewise go up or down along with the PRIME RATE.

Rates can vary by institution. Some lenders charge a low rate but may impose annual fees and other usage fees. It is important that you "read the fine print" before selecting a home equity product based on rate only.

about rate negotiation

Understand Equity Loan Rates

Banks use several factors to calculate the fixed rate on home equity loans. Two key factors include:

1) the lender's cost of funds
2) the lender's cost of capital

Allow us to use this simple illustration

Banks collect and manage money deposits like checking and savings. There is a cost associated with collecting and safeguarding deposits, which include the interest rate consumers collect on their accounts, interest rates from the fed and other banks for borrowed reserves, safekeeping, and other insurance and maintenance fees.

Banks don't let these deposits sit idle. They take these deposits and lend it out in loans and other advances. When banks turn that money into loans, there is a "cost of funds" associated with the use of that money.

Banks are in the business of making money. So they will take the "cost of funds" and other related maintenance and servicing expenses and add a margin as profit. This adds up to the interest rates they are charging for fixed-rate home equity loans.

Of course, there are more sophisticated models that go into the loan rate that include the "cost of capital". But that is beyond this scope.

Just note that when the "cost of funds" go down, lenders pass on the decrease in lower home equity loan rates.

Likewise, when the "cost of funds" increase, you will find an increase in home equity loan rates.

Home equity loans are generally FIXED rates, meaning the rate and payment will remain the same during of the life the loan.

Fixed rates for home equity loans can vary by your LTV position, the amount you borrow, and your credit history rating.

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