Negotiation Tips for Getting the Best Loan Terms

Getting the best terms and rates on your mortgage depends on how well you understand the process and your ability (as well as that of your real estate agent) to negotiate. The following points will help you understand the mortgage process and know what to look out for when obtaining home loan financing.

First, keep in mind that no two loans or borrowers are exactly alike. Everyone has a unique credit score/file, income, borrowing history, etc. Just because your neighbor or friend received a certain rate or program does not mean that you will also be able to qualify for such a program.

Second, mortgage rates change every day. The rate that was available when you first started looking into getting a mortgage will likely be different when you actually “lock” your interest rates in. The mortgage companies and loan officers know this, and sometimes they try to use the complexities of the business against the much less knowledgeable public to push the loan and terms they want.

Third, you need to understand how a mortgage company or loan officer works and is paid. Their income is derived from two sources:

1) The Up-Front Closing Costs. This is money received in exchange for services provided in placing the loan, handling all pertinent paperwork, and explaining the mortgage process to the client. It also includes origination fees, application fees, and any other fees charged at closing with the exception of interest/principle prepays, appraisal fees, document fees, and title fees.

2) The Yield Spread. The yield spread is basically a commission paid by the lender with whom the loan is placed to the mortgage company (sometimes called a mortgage broker) or loan officer. For example, say you qualify for a 6.5% mortgage through Countrywide Home Loans. The loan officer and mortgage company that is handling the loan may get what’s called “wholesale pricing” on the loans they place with Countrywide. Countrywide may offer the mortgage company/broker placing the loan a lower rate (due to the volume they provide) than the 6.5% you will be charged — perhaps 6.25%. The mortgage company/broker and typically the loan officer will keep the difference as their commission. This is all legal and standard procedure in the business. It also benefits the borrower because the alternative would require the borrower to pay much more up front in closing costs, and most people do not have such funds available.

How or what should you try to negotiate for when obtaining a mortgage loan? I’ve observed that most lenders will throw in a free home appraisal if you ask for it. This will save you $250-$500, depending upon where you live. After that, I would recommend the following:

1) Go to your bank and ask for a “Good Faith Estimate” of what a mortgage would cost if that bank were to give you a mortgage. (Yes, you will have to submit a full application just like the one you should have already submitted to your mortgage broker.) Typically, you will find that your local bank’s rates and fees will be a bit higher then those charged by your mortgage broker. This is true with even large, national banks, because brokers get better wholesale rates on the loans they place and can shop your mortgage against hundreds of thousands of different mortgage companies interested in lending the money to you. Your local bank is not really set up to place very many mortgages. The purpose of this exercise is to assure yourself that your mortgage broker is not gouging you on your mortgage. If the broker’s rates are higher than those of your local bank, it will be a good indication that they are trying to take advantage of you. Tell the loan officer at the mortgage broker they need to beat your local bank by at least .125% or you will be taking your business elsewhere. There should be no reason that they cannot do this assuming the local bank did not have you paying extra to “buy down” your interest rate. Sometimes banks will throw that in to make their rates look somewhat competitive, so be sure to discuss this with your local bank. As already mentioned, banks’ interest rates on mortgages are almost always .125%-.5% higher then you could receive from a mortgage broker.

2) Consider “Buying Points.” Normally, closing costs on a loan with yield spread are approximately 2.5%-3% of the loan amount. However, if you can afford to pay roughly 5%-6% of the loan amount at closing, you can obtain the loan with no yield spread. Essentially, you will be receiving the loan at the wholesale interest rate. Due to the way interest rates compound over 30 years, in most situations paying a few thousand extra up front will save you tens of thousands by the end of the loan. Most mortgage companies/brokers call paying this additional money at closing to get a better rate “buying points” on the mortgage. Understand that it’s not just buying points to lower your rate; it’s also allowing you to save tens of thousands throughout the duration of the loan, which is always a good investment.

3) Use a Mortgage Broker. I recommend that you always use a mortgage broker to obtain financing on a home loan. Many will debate this, but as a real estate agent, I have almost always seen that clients who went through a mortgage broker obtained better terms and rates than those who went to their personal bank, etc. The mortgage broker allows you, as a consumer, to have hundreds, if not thousands of lenders, bid for your loan, giving you the best terms they can offer. Also, a loan officer at a mortgage brokerage will be able to offer a more diverse set of loan programs that are not always available at the local bank. Most large banking institutions are, by their nature, very conservative and are not able to offer loan programs tailored to your needs.

It is my hope that these tips and explanations will help you to obtain the best home loan financing available in the marketplace. For additional information and tips on buying a home, please visit our website (http://www.sellingtucsonrealestate.com/buy.php).

This entry was posted on Sunday, December 30th, 2007 at 6:03 pm and is filed under Financing, Buying. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.