Can I Negotiate the Bank's Current Mortgage Rates?

By Brandon Cornett
© 2011 All rights reserved

Reader question: "We are in the process of shopping for a mortgage loan, and we've been looking at the rates that some lenders have posted on their websites. Are these the average rates? And can I negotiate the bank's current mortgage rates after I apply for a loan?"

You've probably heard that everything in real estate is negotiable. This is partly true. I think it's more accurate to say that most things are negotiable during the home buying process. Mortgage rates are certainly one of those things that can be negotiated between the borrower and lender.

But there are plenty of variables we need to discuss. In this article, I'll explain how your qualifications as a borrower can determine your bargaining power. We will also talk about mortgage discount points, and how they can help you negotiate a lower interest rate.

Will Your Qualifications Help You Negotiate?

The well-qualified borrower can negotiate just about anything during the mortgage process, and that includes the lender's current rates. These are people with excellent credit scores, low debt-to-income ratios, and sizable down payment. But if you are weak in one or more of these areas, you'll have a harder time negotiating the lender's mortgage rates.

Consider the difference between these two borrowers:

Tom has a credit score of 790, which is excellent by any standard. He has saved up enough money to make a 20% down payment on his loan. His debt ratio is less than 25%, which means he only spends one fourth of his income on his debt obligations. He also has plenty of money saved for his closing costs and his first few mortgage payments.

Tom is a well-qualified borrower, and any mortgage lender would love to do business with them. As a result, he will probably be offered the best mortgage rates available in the current market. If he is offered anything less, he has plenty of room to negotiate a lower rate.

Brian has a credit score of 610, which is barely enough to get a mortgage loan these days. He will probably have to use the FHA loan program because he can't afford much of a down payment. His debt ratio is around 43%, which means a significant portion of his income goes toward his debt obligations. He may have trouble meeting the lender's requirements for cash reserves, because he's already stretching it to cover his down payment and closing costs.

Lenders will view Brian as a much higher risk than Tom. As a result, they probably won't offer their best interest rates. Brian can try to negotiate the lender's mortgage rate, but he doesn't really have a leg to stand on.

Here's the key difference between these two borrowers:

• If Tom doesn't like the interest rate offered by the mortgage lender, he can take his business elsewhere. The lender knows this, so they will be more willing to negotiate their rates with Tom.
• Brian will be lucky if he can just "squeak by" to get a mortgage loan. Both Brian and the lender realize this. So he is not in much of a position to negotiate for a lower mortgage rate.

But Brian might be able to lower his interest rate by using discount points. And that's what we will talk about next.

Using Discount Points To Lower Your Mortgage Rate

During the mortgage process, you will probably be given the chance to pay discount points (a.k.a. interest points) on the loan. This is a form of prepaid interest. One point equals 1% of the loan amount. So if you paid one point on a $250,000 mortgage loan at closing, you would be paying $2,500.

There is a seesaw relationship between discount points and mortgage rates. This means you can raise one to lower the other. Some borrowers choose to pay more prepaid interest at closing in order to lower their interest rates. The mortgage rate reduction will vary from one lender to the next, but a point will typically lower the rate by 0.25% or more.

In order for this strategy to work, you have to stay in the home and keep the mortgage loan for a certain period of time. Remember, you're paying more money at closing in order to reduce the interest rate over the term of the loan. If you only stayed in the home for a few years, you probably wouldn't save enough money (from the lower rate) to justify the extra amount you paid at closing.

But if you stay in the home for many years, the lower mortgage rate will more than justify the discount points you paid. That's why most people use this strategy in conjunction with a 30-year fixed-rate mortgage loan.

What Is Your Top Priority?

Using discount points to negotiate the lender's mortgage rate is really a matter of priorities. So you have to think about what you're trying to accomplish during this process. If your top priority is to make your mortgage payments as small as possible, then you should consider paying points to negotiate a lower rate. But if you're more concerned with reducing your closing costs, you should forgo the discount points and take the slightly higher interest rate.

Remember, the points are paid upfront, while interest is paid on a monthly basis over the term of the loan. Which one works best for you?

This article explains how to negotiate the bank's current mortgage rates, based on your qualifications as a borrower. It also shows how you can prepay interest with discount points, in order to lower your long-term interest rate. If you would like to learn more about any of the topics discussed in this article, I recommend using the search tool located at the top of this website. We have dozens of articles that talk about other aspects of the mortgage process. So you're bound to find something useful.