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
About Rates
The interest rate is an annual percentage rate that lenders charge for home loans. Your monthly mortgage payment includes an amount for the interest rate charges and repayment amount for the loan balance.
Interest Rate Terms
- Initial Rate:
This is the initial rate that the bank quotes for a mortgage loan. It is the rate that calculates the amount of interest you pay each month. - Annual Percentage Rate (APR):
The actual interest rate the borrower pays when all the costs of obtaining the loan are included. - Effective Percentage Rate:
The rate that reflects the total interest paid after adjusted for items such as interest rate deductions from your taxes.
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about rate negotiation
Calculating APR
APR is the actual percentage interest rate the borrower pays when all the costs of obtaining credit are included. APR includes points and other lending assessed fees.
Lenders are required to report APR so that borrowers can compare lender quotes and fees. You should always compare the APR when evaluating lender quotes.
Example of APR:
Borrowed amount: $100,000
Quoted initial rate: 7. 00%
Number of points: 0 points
Term: 360 monthsAPR: 7.00%
In this example, the APR is the quoted initial rate of 7.00% because no additional fees were included.
Another Example of APR:
Borrowed amount: $100,000
Quoted initial rate: 7. 00%
Number of points: 1 point (1% of the loan amount)
Term: 360 monthsAPR: 7.099%
In this example, the APR is greater than the quoted initial rate because points were added to the cost of obtaining the loan. The APR of 7.099% becomes the actual percentage rate after including all points and other lending assessed fees.
about rate negotiation
What About Points
Points are prepaid interest that lenders charge for the cost of borrowing money. Charging points is a standard practice among mortgage lenders. A point equals 1% of the amount you borrow.
For example:
If you borrow $100,000 and pay 2 points, your "cost" to borrow that money will equal: $2,000.
You have the option to pay the points "up-front" at the time of closing or have the lender subtract the points from the amount they lend you.
Example:
if you are borrowing $100,000 and select to subtract 2 points from your loan amount, the lender will take out $2,000 and give you $98,000.
For tax purposes, it makes no difference whether you pay the points up-front or have them deducted from the loan amount. Points are considered "interest-paid" and may be fully deductible in the year you pay them.
Points and APR
Points can raise your APR. One point is roughly equivalent to one-eighth raise in your initial rate on a 30-Yr mortgage.
Example:
a 30-year mortgage rate at 9% and 2 points is roughly equivalent to an APR of 9.25%.
Under a 15-Yr mortgage term, one point is roughly equivalent to one-sixth raise in your initial rate.
Example:
a 15-year mortgage rate at 9% and 2 points is roughly equivalent to an APR of 9.35%.
Sometimes you can pay additional points to reduce your interest rate. A lender may quote an initial rate of 9.25% and another rate at 9.0% if you pay 2 points.
Compare rates vs. points calculation:
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Be prepared to negotiate points
Note that points and other originating fees are marketing compensation fees for originating your loan — in other words, it is the "profit" for brokers and lenders.
As an informed mortgage shopper, you are in a position to negotiate these "profits" down if you are in a strong qualifying position for a mortgage loan. A little profit is better than no profit if the lender knows that you can go somewhere else.
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.
Helpful Tools
Some helpful tools for making decisions:
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