Can I Negotiate My Mortgage Rate With the Bank or Lender?

Reader question: "We are about to start the process of applying for a mortgage loan, so we've been reviewing the interest rates posted on various bank websites. How can we negotiate the mortgage rate offered by the bank or lender, after we apply for the loan?"

Yes, you can try to negotiate the interest rates presented by the lender. Whether or not you'll be successful is a different story. Much will depend on your qualifications as a borrower. Generally speaking, well-qualified borrowers have more negotiating power than those who are marginally or poorly qualified for a home loan.

You can also use prepaid interest points to negotiate a lower mortgage rate from the bank. But we're getting ahead of ourselves. Let's start by talking about those all-important qualifications I mentioned above.

Well-Qualified Borrowers Have More Negotiating Power

Do you have a solid credit score and minimal debt? Can you afford to make a down payment in the 20% range? Is your income more than sufficient for the amount you want to borrow? If so, you are a well-qualified borrower. And you'll have an easier time trying to negotiate the mortgage rate offered by your lender, bank or credit union.

These are ideal parameters for borrowers, as far as qualification criteria are concerned. If you fall within this range, you can negotiate almost everything during the mortgage process. If you fall below this standard, on the other hand, you'll have less negotiating power.

Strong borrowers can pick and choose the best mortgage rates, fees and terms. Marginal borrowers have to take what they can get, and be thankful they can get approved at all. That's a harsh reality of the lending world.

A Real-World Example: Lisa and Lee

This will make more sense if we use a real-world example. So let's meet Lisa and Lee, two mortgage shoppers:

Lisa, well-qualified borrower

Lisa has an excellent credit score of 810. She achieved this score by paying all of her bills on time in the past, and by using credit sparingly.

She has enough money in the bank to make a 20% down payment on a home.

Lisa's total debt-to-income (DTI) ratio is around 18%, which is very good by current lending standards. She also has more than enough money in the bank for closing costs and her first few mortgage payments.

Lisa is a textbook example of a well-qualified borrower. She could qualify for a home loan through any number of lenders. This puts her in a good position when it comes to negotiating. She should be able to negotiate a good mortgage rate from her lender. If the lender doesn't offer her a highly competitive rate, Lisa can take her business elsewhere.

Lee has a much lower credit score of 610. With some lenders, this will put him right on the line between qualified and unqualified.

Lee, average borrower

He can only afford a down payment of 3% to 5%, depending on the ultimate size of his loan.

Lee's total debt-to-income ratio will end up being somewhere between 39% and 43%, once he takes on a mortgage loan. As far as cash reserves go, he can cover his closing costs but no more.

Lee is a marginally qualified borrower. Lenders will see him as a bigger risk, based on his credit score and debt ratio.

He won't have much negotiating leverage. In fact, he will be lucky just to qualify for a loan. He certainly won't be able to negotiate a competitive mortgage rate from the lender.

Here's the main difference between these borrowers, in terms of negotiating power:

  • If Lisa isn't satisfied with the interest rate offered by the first lender, she can apply elsewhere. The same goes for excessive mortgage fees. Lenders prefer borrowers like Lisa. She is an ideal candidate for a home loan, with a lower risk profile than most borrowers. As a result, she's in a better position to negotiate the mortgage rate and fees.
  • Lee, on the other hand, will be lucky to "squeak by" and qualify for a loan. If three out of four lenders turn him down, he won't have very much negotiating power with the fourth. He is not in a position to negotiate a lower mortgage rate.

In the mortgage world, this is known as risk-based pricing. Lenders use credit scores and other factors to determine the level of risk brought on by individual borrowers.

In the scenario above, Lee will be viewed as a riskier borrower than Lisa, due to his financial profile and credit history. They will charge him a higher interest rate as a result, and he probably won't be able to negotiate the mortgage rate downward. He doesn't have a leg to stand on.

But there's another way to reduce your interest rate. It involves the use of mortgage points, or "discount" points. And even marginally qualified borrowers like Lee can use this strategy.

Using Discount Points to Negotiate a Lower Mortgage Rate

Want to negotiate a lower mortgage rate from your lender? Try paying points at closing. Borrowers can use this strategy to "buy down" the mortgage rate assigned to their loans, thereby paying less interest over time.

Definition: A discount point is one of two types of mortgage points (origination points are the other). A point is equal to one percent of the amount being borrowed. Example: One point on a $300,000 home loan equals $3,000. Two points on the same size loan would equal $6,000. Discount points are a form of prepaid interest. You can pay them at closing to secure a lower mortgage rate on your loan. It's like paying some of the interest up front, to avoid paying it over the long term.

There is an inverse relationship between mortgage rates and discount points. Borrowers can secure a lower rate by paying more discount points at closing.

The amount of interest reduction will vary from one lender to the next. Generally speaking, one discount point will lower the mortgage rate by 0.25%.

Example: If a lender offers a rate of 5% with no points, the borrower might choose to pay one point at closing to reduce the rate to 4.75%. Two points would bring it down to 4.5%. In this scenario, the borrower is using prepaid interest to negotiate a lower mortgage rate from the lender.

This strategy only works to your advantage when you keep the mortgage for a certain period of time. If you plan to stay in the home for many years without refinancing, discount points can save you money in the long run. In this scenario, you would save more in monthly payments (over the years) than the amount paid up front in discount points.

It's a tradeoff. You're paying more up front, and out of pocket, to secure a lower mortgage rate over the long term.

Disclaimer: 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, use the search tool located at the top of this website. We have dozens of articles that cover other aspects of the mortgage process. So you're bound to find something useful.