Are mortgage rates negotiable? Learn tips and essentials

Yes, mortgage rates are negotiable. In fact, home buyers and refinancing homeowners should negotiate their mortgage rates.

Borrowers with lower mortgage rates can pay less each month, saving thousands of dollars over the life of the loan and building home equity faster.

With these types of rewards on the table, it never hurts to ask for a better deal. But borrowers should also know what is, and what is not, possible. 

How to negotiate mortgage rates

The best negotiators don’t ask for the impossible. They make bold requests that could happen. 

For instance, you wouldn’t offer $5,000 for a brand new car that sells for $50,000. If a car dealer accepts such an offer, you’d probably be suspicious of the car, the dealer, or both.

With mortgages, it’s not always easy to know what’s reasonable. These tips can help.

1. Learn about market rates

Mortgage rates change daily, but borrowers don’t have to track the daily nuances of the market. (That’s what loan officers are for.) Borrowers should know this week’s average rate for the type of loan they’re getting.

Weekly average rates set the context for individual rates. For instance, if weekly rates for a 30-year fixed-rate mortgage are 6.8 percent, asking for a rate of 2.5 percent would be like offering to pay $5,000 for a $50,000 car. It’s not a good way to open negotiations.

2. Know your own financial profile

Average market rates create the ballpark for today’s individual mortgage rates. But will a borrower’s rate come in above average or below the current average? The borrower’s unique financial profile helps answer this question.

For the lender, this decision boils down to risk: 

— Higher risk borrowers: Borrowers who barely have the income and credit score to qualify for the loan and will be making the minimum down payment will have a hard time making a case for a below-average mortgage rate.

— Lower risk borrowers: A borrower who makes a large down payment, has excellent credit, and plenty of room in the monthly budget for the house payment can make a strong case for a below-average mortgage rate.

Most borrowers fall somewhere between these two extremes. Knowing where your mortgage application falls can help identify your best mortgage or refinance rate.  

3. Compare offers from different lenders

Different mortgage lenders measure borrower risk differently, so borrowers shouldn’t accept the first Loan Estimate they see. Borrowers should always compare Loan Estimates from at least three lenders. 

A variety of financial institutions — including brand name banks, local credit unions, mortgage brokers, and online lenders — underwrite mortgages. Credit unions and online lenders like Better that specialize in mortgages usually offer competitive rates. 

Better’s simple online application process shows personalized rates within minutes, making it even easier to compare loans.   

When comparing a Loan Estimate from Better to Loan Estimates from other lenders, make sure interest rates on all estimates include the same number of discount points. Otherwise you’re not comparing apples to apples. 

4. Then, ask for a lower rate

Borrowers who have seen future loan costs side by side on Loan Estimates usually have the confidence to negotiate for a better deal on the mortgage rate.

And it’s OK for borrowers to show one lender the costs they’d be paying a different mortgage lender. This may feel disloyal to some people, but it’s better for everyone to be honest during the shopping process. One lender may be able to match or beat the other lender’s offer.

Borrowers should shop around before the lender puts in for the rate lock.

Negotiating mortgage fees

Many first-time borrowers dial in on their loan’s interest rate, forgetting that upfront costs matter too. Upfront costs include one-time fees charged by the lender, fees for professional services needed to close the loan, and fees that help set the mortgage rate. 

Collectively, these fees are called closing costs, and they can total 5 percent or so of the home’s price. Home buyers and refinancing homeowners can lower some of these upfront fees by negotiating. 

Depending on how long the borrower keeps the loan, closing costs may have a bigger impact than the interest rate. 

Negotiable fees

Borrowers can negotiate fees charged by the lender. These fees go by several names, including:

— Application fee
— Processing fee
— Origination fee
— Underwriting fee

These fees should appear in Section A of the Loan Estimate. If they don’t, ask about them. 

Home shoppers and refinancing homeowners should be wary of no-fee loans. Mortgage lenders cover their costs by charging fees. If they aren’t charging fees they’re covering costs in some other way. This may be OK with the borrower, but it’s best to know for sure.  

Non-negotiable fees

Many closing or settlement costs pass from the lender to the borrower, but the lender itself doesn’t charge the fees. They’re charged by third parties that provide professional services needed to close the refinance or new home loan.

These include:

— Recording or filing fees: Local governments charge fees to register deeds and record mortgages and titles.

— Appraisal fees: A third-party appraiser will assess the value of the home to make sure the borrower isn’t paying too much. 

— Property taxes: Local governments set tax rates. The lender and borrower have no direct control over these costs.

— Credit report fees: These fees cover the cost of pulling the borrower’s credit reports and credit scores.

— Mortgage insurance: Either a federal agency or a private mortgage insurance (PMI) company will set this cost. Government insured loans charge an upfront mortgage insurance premium.

— Prepaid interest: The first mortgage loan payment on the new loan typically comes due more than a month after closing on the home. Prepaid interest covers finance charges during this period.

— Escrow fees: The title company or closing agent will use an escrow account to hold and distribute funds during the closing process. The escrow fee pays for this service.

— Flood-related fees: These fees cover research into whether the home is located in a flood plain and needs federal flood insurance. 

Third-party fees borrowers can influence

For some non-negotiable fees, borrowers can still influence costs by shopping for a less expensive service provider. 

This is true for:

— Title service and insurance fees
— Pest inspection fees
— Survey fees

Borrowers who would like to shop around for these services should let the lender know early in the application process. The title service will organize the closing process in many states, so lenders need to know which title service to work with.

Mortgage rate negotiation strategies for different kinds of borrowers

Different borrowers need different negotiation strategies:

Homeowners looking to refinance

Refinancing homeowners have a big advantage over home buyers: They have more time to shop for a lower interest rate and lower fees. 

Refinancing homeowners have time because they already live in their home. They already have a mortgage. They don’t risk missing out on the chance to buy, and they won’t upset the timing with a home they’re simultaneously selling.

With this flexibility at their disposal, refinance shoppers should take their time and compare a variety of new loans to their current loan. A mortgage calculator can help. They can afford to ask for a better deal before agreeing to a rate lock, especially when they have an excellent credit score and plenty of home equity.

Home buyers with excellent financial profiles

Home buyers who have an excellent credit score, a big down payment, a healthy savings account, and more than enough monthly income to qualify for the loan should ask for the market’s most competitive interest rate.

When buying a new primary residence, these types of borrowers pose the least amount of risk to the lender. Lenders should be able to respond with a lower-than-average mortgage rate.

After negotiating for the best rate, these buyers may want to pay discount points that lower their rate even more, especially if they plan to keep the loan for 10 years or more. Discount points trade cash up front for a lower interest rate throughout the loan’s term.

Home buyers with OK personal finances

Mortgage borrowers who present moderate risk to the lender can sometimes benefit most from shopping around. These borrowers typically have some good financial data and some not-so-good data. For example, they may have a healthy savings account, lots of income, but a shaky credit score. 

Some lenders will overlook one or two negative factors when the borrower compensates for them by having other strong factors. The best way to find out which lender will look most favorably on the application? Shopping around and comparing offers, of course.

Home buyers with weaker financial profiles

Home buyers with average credit, minimum down payments, and tight monthly budgets shouldn’t expect the market’s lowest mortgage rates, but they don’t have to accept abnormally high APRs either.

These borrowers should get Loan Estimates from at least three lenders in search of their best offer. 

An FHA loan is often the best loan type for these borrowers, though military-affiliated home buyers should check out the VA loan program which requires no down payment and no monthly mortgage insurance costs.

First-time home buyers

First-time buyers benefit from an FHA loan’s low down payment requirement. The FHA insurance built into these loans helps reduce the lender’s risk. To qualify for FHA insurance, the mortgage lender follows the FHA’s rules, but lenders still have some leeway about interest rates. First-time buyers getting FHA loans should still shop around for their best deal.

First-time buyers can also increase their negotiating power by making a larger-than-required down payment. The FHA allows friends and family members of home buyers to contribute to their down payment. The FHA also allows home sellers to help more with closing costs, compared to conventional loans, leaving more room for down payment money.

Putting together a 10 percent down payment — instead of the 3.5 percent minimum required — could give first-time buyers a little more negotiating juice while also saving some money on the FHA’s mortgage insurance premiums.

Start shopping with a Better Mortgage preapproval 

In any type of negotiation, knowing your value and where you stand is a good place to start. 

Borrowers can check their own credit history and calculate their own debt-to-income ratio to get a sense for their negotiating power.

Or they can get a mortgage preapproval to see how their financial data looks from a lender’s point of view.

Better’s preapproval process happens all online, requires no hard credit check, does not obligate the borrower, and shows results within minutes. Get started here.

...in as little as 3 minutes – no credit impact