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Negotiating Your Best Mortgage Deal

Lots of people know that you should shop around for a mortgage to get the best deal. But what's less commonly known is that you can negotiate mortgage terms as well. In fact, the two should be combined, with shopping around to find out what kinds of terms are being offered, then using that information to press for the best deal with your chosen lender.

What can be negotiated?

Loan officers and brokers typically work on commission. They usually receive a portion of the origination fee, sometimes called the underwriting or administration fee, and may also profit from some of the smaller lender fees added on as well. As a result, they may be willing to reduce or waive some of these fees in return for your business, particularly if you look like a safe bet to be approved for the loan.

You can also negotiate the interest rate itself. Loan officers and brokers receive rate sheets each day showing current interest rates for various types of mortgage products and borrower criteria. Just like with mortgage fees, they have a certain degree of freedom to trim the rate a bit in return for taking a little less commission themselves. Some lenders will even set their "official" rates a bit high in the expectation the borrower will want to negotiate a reduction - sort of like the sticker price on a new car.

Negotiating only works, however, if your loan officer or broker works on commission and has the freedom to make concessions. Some loan officers, particularly those with online lenders, are on fixed compensation and do not have the freedom to negotiate loan terms with you. That doesn't mean you should avoid online lenders when negotiating a mortgage, just that you should take their offer and compare it to whatever you can get by negotiating elsewhere.

Third-party mortgage fees

Many third-party fees will not be negotiable. These include any fees paid to government agencies for such things as recording the deed, transfer taxes or land survey. You also can't negotiate the fee for a property appraisal because that, by law, has to be done by an independent appraiser selected by an outside agency without input from you or the lender.

For other third-party fees, a lender will usually suggest certain providers for such services as title searches and insurance; home inspections, attorney services and the like. You probably won't be able to negotiate these, but if you know of other providers who charge less than those your lender suggests, you can ask to have them provide those services instead. If you've shopped around with other lenders, you'll be able to see what they're listing as charges for those same services and should be able to find out which providers they use.

About discount points

One of the most common ways of lowering a mortgage rate is through discount points. This is actually a way of buying a lower rate by pre-paying some interest and can be a good deal if you're planning to stay in the home long enough to offset the upfront costs. Each point costs 1 percent of the loan amount and lowers the rate by a fraction of a percent, which varies from lender to lender.

With discount points, it's probably best to first negotiate your best mortgage deal without points, then inquire about buying points if you think you'd like to include them. Since their cost and the rate reductions they buy are typically fixed, it's easiest to add them in after other terms have been negotiated.

Getting down to haggling

What makes negotiating a mortgage difficult is that there are so many different fees and each lender has their own fee structure, often using different names for the same fees and charging different fees entirely. One lender may charge for copying costs while another may simply roll those into the origination fee as a part of doing business.

You can go through the list of fees (which will be provided on the Truth in Lending form when the lender makes you an offer) and negotiate them one at a time. In fact, it's a good idea to go over the list with your lender and make sure you understand what each fee is for - is it for a genuine service or is it just a "garbage fee" that does nothing but pad the lender's profit?

Figuring out all those fees and separating the good ones from the bad can be a pretty big challenge, though. It's a lot easier to simply lump all the lender fees together, add them up and treat them as a single total. That way, you can just go to a lender, say "these are the total fees other lenders are offering, I'll pay you a total of $XX for the mortgage at this interest rate."

Balancing fees versus rates

Of course, to make an offer like that, you need to be comparing loans with the same interest rate. As we noted earlier, some lenders offer lower rates but higher fees. How do you know what's the best deal in that situation?

The best way to do that is by using a mortgage calculator. Put in the loan amount, add in the total fees being charged (even if you're not planning to finance them as part of the loan), enter the interest rate and duration of the loan and let the calculator tell you what your monthly payment would be. The lower the monthly payment, the lower the overall cost of the loan.