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Negotiate Best Rates

knowing about rates and points
A brief review on how mortgage rates and points work. Learn what mortgage professionals know to negotiate best rate and terms.

 

Page Topics :

  1. negotiating steps for best rate
  2. what are mortgage interest rates
  3. let's discuss and review points
  4. comparing mortgage loan terms
  5. APPLY NOW | or call 1-877-777-1370
  6. lender shopping sheet and checklist
  7. mortgage financing map
  8. FREE: loan calculating worksheet

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Negotiating Steps for Best Rate

Important Note: published interest 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. To get the best rate, you must negotiate your rate down using the following steps:

 

First step, check your credit rating:

the higher your credit score (FICO 720 and up), the stronger your position to negotiate best rate.

tool: see checking your FICO score

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

calc: click here to calculate ratios

you might consider paying off your debts, closing credit card and retail charge accounts that are not in use prior to submitting your 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.

review the step-by-step mortgage lending process

— it will point out important mortgage lending steps and processes

 

Submit your application:

allow our network of financial advisors from your area compete for your business - get up to 4 lender quotes

start your application | who are the lenders

 

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 rates and terms:

compare these lender rates and terms with other published rates and with lenders in your local market

 

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 offer.

 

 

Please note: rate information supplied by external links do not reflect your actual rate. Your actual rate is a reflection of your credit score, loan amount, LTV position, and competing factors as you negotiate best rates and terms among lenders.

Note that home mortgage rates can change daily. Rates will also differ by region and locality.

We are not a lender and cannot determine rate based on the factors above. Rather we list references to rate information where you can view sample rates from various regions and lenders.

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What are Mortgage Interest Rates

The mortgage 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.

Mortgage interest rates are tax deductible for qualified individuals. You can deduct the amount of interest paid during the year if you file Tax Form, Schedule A. See your tax advisor for more information.

 

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.

 

Calculating APR
   
·  

Annual Percentage Rate:
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. In the past, lenders used to entice borrowers with low rates but then end up charging high fees. APRs protect consumers from predatory pricing.

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 months

APR: 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 (equates to 1% of the loan amount)
Term:
360 months

APR: 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.

 

Calculating the Effective Interest Rate
   
·   Effective Interest Rate:
The effective interest rate is the interest rate you will pay after deducting qualified interest related expenses from your taxes.

You should discuss tax deductibility with your tax advisor.

   
·   Example of Effective Tax Rate:

Amount of interest paid during the year:
$10,000
APR:
7. 00%
Tax Rate:
28%
Eligible tax deduction:
$2800

Effective tax rate:
5.04%

In this example, the actual interest paid after deducting a portion from your taxes is $7200. The effective interest rate now becomes 5.04% for the year that interest rate deductions were taken.

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Let's Review 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. See your tax advisor for more information.

 

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:
www.dinkytown.net

 

Is it better to pay points for a lower rate or pay the higher rate?

  1. It depends on how long are you going to stay in the home.

    As a general assumption, it takes about 5-7 years to recoup the cost of points. If you are planning to sell your home within this time frame, it may be better for you not to pay points.

    For illustration:

    Loan amount: $100,000
    Term: 30 years
    Mortgage Loan: 2 points Mortgage Loan: 0 points

    Rate: 6.50%
    Payment: $632.07

    Cost of Points: $2,000

    Rate: 7.00%
    Payment: $665.30

    Cost of Points: $0

    Monthly Net Payment Increase: $33.23

    Recoup Costs: 5 years
    ($2000 / $33.23 / 12 months)

    Loan amount: $200,000
    Term: 15 years
    Mortgage Loan:
    3 points
    Mortgage Loan:
    0 points

    Rate: 5.90%
    Payment: $1,676.93

    Cost of Points: $6,000

    Rate: 6.60%
    Payment: $1,753.23

    Monthly Net Increase: $76.30

    Recoup Costs: 6.5 years
    ($6000 / $76.30 / 12 months)



  2. It depends on the time value of money.

    You need to analyze whether you can get a better return by investing your "points".

    You must consider your tax bracket and the investment's ROI vs. the interest rate being charged for your mortgage.

    Try this calculation from smartmoney.com: click here

 

Be Prepared to Negotiate Points

There are two parties that play a roll in originating mortgage loans:

  1. the mortgage underwriter
  2. the mortgage distributor (or marketer)

 

Mortgage Underwriter:

the mortgage underwriter is the lender of money. They take money from a pool of funds (in most cases, deposit money) and lend it to the homebuying market at a base percentage.

The base percentage includes the cost for using the money and a margin for profit.


Example:*    
  Cost of Money: 3.50%
  Servicing Costs: 0.75%
  Other Costs: 0.25%
  Profit Margin: 1.50%
  Base Percentage: 6.00%

*This is a sample of deriving base percentage and does reflect the actual numbers of the industry.


But there are additional costs that the lender must incur. These costs include the marketing or distribution costs in getting the loan money to the buying consumer.

Lenders will then add points to the base percentage to cover their marketing and distribution costs.

 

Mortgage Distributor:

the mortgage distributor is generally the "retailer of the loan" who meets with you to select and finalize your mortgage product.

These distributors can be the mortgage loan officers of the lending institution or the mortgage broker.

  • The mortgage loan officers work for the lending institution.

    They have their offices scattered around the community where you can meet one-on-one to discuss your mortgage needs from the lender they represent.

    They are paid a salary and in some cases a commission for every mortgage loan that they originate.

  • Brokers on the other hand work independently of lending institutions.

    They work on your behalf of the borrower to shop among multiple lenders for the best product and price.

    These players are usually paid a broker fee by the lender when they originate the loan on the lender's behalf.

 

Compensation for commission and broker fees

are in many cases the points that lenders add to their base percentage rate when they quote mortgage rates.

If you desire to pay zero points, lenders will then raise the base percentage rate to cover their cost of marketing and distribution (with a little profit in there too).

 

So What's the Point

Negotiate:
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 with another lender.

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Comparing Mortgage Loan Terms

Compare APR (rate):

The APR, expressed as a yearly rate, takes into account not only the interest rate but also points, broker fees, and certain other credit charges that you may be required to pay.

Comparing the APR among lenders is an effective way to shop for mortgage loans. But you must compare similar loan products for the same loan amount and terms.

 

Compare Points

Points are fees paid to the lender or broker for the loan. The more points you pay, the lower the rate.

Request that points be quoted as a dollar amount so that you will actually know how much you will have to pay.

Also note that points can be negotiated.

 

Compare Fees

The processing of your mortgage application and closing settlement may require payment for loan origination or underwriting fees, broker fees, and transaction, settlement, and closing costs.

Every lender or broker is required to give you an estimate of its fees. Compare these fees among several lenders. Many of these fees are negotiable.

 

Compare Numbers

Some lenders will offer lower closing costs for higher up-front points.

When you add it all together, the total cost may be less than a mortgage product with lower up-front points but higher back-end closing costs. These are all negotiating areas with your lender.

Note that your individual situation such as how long you intend to remain in the house and your tax situation (points are tax deductible) may affect your loan comparison.


For more loan comparison information:
www.pueblo.gsa.gov

Download this loan comparison worksheet:
from our download center

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Calculate Your Debt Ratio

The debt-to-income ratio is calculated by: dividing your fixed monthly debt expenses by your gross monthly income.

Total Debts  
Monthly Mortgage or Rent (including escrow):
Monthly Auto or Other Installment Loan Payments:
Minimum Monthly Credit Card Payments:
Minimum Credit Line Payments (home equity):
Monthly Real Estate Non-Income Loan Payments:
Monthly Alimony and Child Support Payments:
Monthly Tax and Legal Assessments:
Monthly Other Payments:
Total Income  
Monthly Gross Salary or Pay:
Annual Bonus:
Monthly Alimony / Child Support:
Other Monthly Income:
*
Monthly Debt Payments:
Monthly Gross Income:
   
Debt-to-Income Ratio (should be around 36%): %

Debt Ratio Barometer:

  • 36% or less:
    debt level within acceptable range for most people.

  • 37%-42%:
    debt level a little high, need to take corrective action to bring debt level down. You may consider paying off or consolidating some of your debt.

  • 43%-50%:
    danger level, need to take immediate action before you lose control of your financial situation.

  • 50% or more:
    excessive debt loan, may need to seek credit counseling services
* Calculations are based upon the assumptions you entered. Please note that rounding errors can make a small difference in calculations.
 
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