Even in the best economies, getting a mortgage loan is stressful. The monthly payments, up front fees and even the investigation into your creditworthiness can take their emotional toll. For all this anxiety, borrowers owe it to themselves to get the most advantageous loan terms with fees kept to a minimum.
How Your Bank Profits
Banks and finance companies lend money to make money. They might portfolio the loan, i.e. keep service it themselves, profiting from the interest payments. Alternatively, lending institutions can also sell their loans to larger lenders or government-chartered investors like Fannie Mae, which directly compensates the original lender.
Financial institutions also charge various fees; ostensibly to cover the resources and manpower needed to process the loan. Application fees, underwriting fees and processing fees can cover such administrative tasks as ordering credit reports, computer underwriting programs, employment verifications, property insurance confirmation and closing document preparation. These do not necessarily include fixed charges by third parties, like appraisal fees, pest inspections and title insurance.
Negotiate from Strength
While banks want to make mortgage loans, the granting of such credit represents risk. Interest rates and fees -- which together are calculated as the Annual Percentage Rate, or APR -- serve to offset the losses from defaults. Rates are often based on variables in the bond market and what the investors are willing to pay for mortgage loans. Yet lenders ultimately set their own rates to ensure a healthy bottom line. Flexibility with terms, then, is a balancing act weighing risk against profit. Low risk can translate into possibly lower rates and waived fees.
Potential borrowers can sometimes negotiate rates down by presenting the bank with an excellent credit profile. Credit scores in the high 700s or 800s show the lender that the applicant pays her bills on time and is not overburdened by debt. Also counting in the applicants favor is a consistent work history, showing wages more than adequate to shoulder the new mortgage obligation. In the same way, demonstrating healthy assets in checking savings, investment and retirement accounts gives the financier confidence of continued payment in the event of job loss.
Negotiate with Knowledge
As with any business enterprise, mortgage lending is competitive. An applicant who is well schooled in the loan products of a variety of lenders reminds loan officers that their bank is not the only game in town. If a bank has more business than it can handle at the moment, it can afford to be strict with even the most savvy of borrowers. Conversely, when the applicant pool is smaller, lenders will make exceptions for loan seekers who know of other companies offering more favorable terms.
A Word About Points
Paying points up front is a common way to lower the interest rate, thereby reducing the monthly payment. If cash flow is of prime concern, this option might make sense. Otherwise, take caution as points can severely increase your financial burden at closing. Do the math meticulously to make sure paying points makes sense.
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