Can you negotiate the terms of your mortgage?

Yes, in some cases you can. Here’s how.

You can cut your interest rate using two different strategies.

By Robyn A. Friedman -- Globe Correspondent

September 14, 2022

The seller has accepted your offer, and you have a signed purchase agreement in hand. You’ve shopped for the best mortgage rates and are ready to submit an application, but have you negotiated the terms of that mortgage? Could you? Should you?

To provide liquidity to originators and to stabilize the market, the majority of mortgages — 62 percent in 2020, according to the Federal Housing Finance Agency — are sold on the secondary market to Fannie Mae and Freddie Mac. But Fannie and Freddie have strict guidelines that limit the loans they can buy. They also are limited by statute to buying loans less than the “conforming limit,” which changes every year and depends upon the location of the home. Mortgages over the conforming limit are considered “jumbo loans.” Many lenders hold jumbo loans in their portfolio, while others package them and sell them to investors.

“As far as qualifying, we are more flexible qualifying the borrower if it’s a portfolio loan because we can set our own guidelines,” said Patti Lotane, a mortgage loan officer for Cape Cod 5 in Chatham. “We do common-sense lending. We use Fannie and Freddie guidelines as a guide, but we can go outside of that.”

One example: Lotane said there are a lot of retired people on Cape Cod, and they may have substantial assets but no regular income from other sources. “We can look at asset-based income to qualify them,” she said. “There’s more flexibility.”

Similarly, there may be some flexibility on interest rates for loans held in Cape Cod 5′s portfolio, Lotane said, meaning that if the bank’s rate is slightly higher than a competing lender, they may match it to keep the customer.

Other mortgage terms that may be possible to negotiate, depending on the lender, include:

· Escrows Unless the property is in a flood zone, Cape Cod 5 doesn’t require borrowers to escrow for insurance or taxes if they put at least 20 percent down, Lotane said. But Janine Ranski, a retail mortgage banking executive at PNC Bank, said that if a customer opts not to escrow, “there is typically a hit to their interest rate for doing that” to offset the increased risk to the lender.

· Processing fees “There are a few fees upfront that are pretty standard, and some banks might be willing to waive them, but that’s bank-specific,” Ranski said. She is referring to lender charges, such as the application, processing, and lock-in fees. Actual out-of-pocket expenses the bank pays to a third party, such as the cost of an appraisal, would be harder to negotiate, she said.

· Interest rate. You may be able to reduce your interest rate using two different strategies. First, if you have a relationship with a particular lender, whether that’s a lot of cash on deposit or a business-banking relationship, you may benefit from relationship pricing. “Whether it’s PNC or Chase or Citibank, if you have a specific amount of money — and every bank is a little different — you could qualify for a discount toward your interest rate because you’ve retained those assets at the bank,” Ranski said.

Also, almost every lender will allow you to “buy down” the interest rate by paying points. One point equals 1 percent of your mortgage amount, so if you have a $100,000 mortgage, one point equals $1,000. When Lotane was interviewed a few weeks ago, when the rates were lower, she said that if a customer applies for a $400,000, 30-year fixed-rate mortgage with 20 percent down, the rate would be 4.875 percent with no points, and the monthly payment (principal and interest) would be $2,116.83. However, if the customer paid 1 point, or $4,000, the interest rate would go down to 4.625 percent, with a monthly principal and interest payment of $2,056.56, for $60.27 in monthly savings. At that rate, the borrower would break even in 66 months, so if the customer plans to spend more than 5.5 years in the house, paying one point to reduce the interest rate makes sense.

Laura Lowe, a real estate agent with The Agency in Boston, used a rate buydown to complete a transaction scheduled to close later this month. When her clients recently made an offer on a home in Medway, the interest rate on a jumbo 30-year, fixed-rate mortgage was 4.5 percent with 1 point, but the sellers rejected it. The buyers made a second offer, but by that time the interest rate had increased to 4.65 percent with 0.97 point, making the home less affordable. “The lender said it would be great if we could get the seller to give the buyers a $5,000 credit, and then, at the closing, that money would go to the bank to buy down the mortgage rate,” Lowe said. The strategy worked, and the buyers are set to close on their four-bedroom home on a scenic, wooded street for $832,000.

If you’re interested in trying to negotiate your mortgage, consider two things. First, you may be more successful using a small community-based lender, particularly if you’re looking for a loan to buy land, according to Rosella Campion, a loan officer and branch manager for the Boston office of loanDepot. Second, don’t make your decision based only on the interest rate. Lenders vary in their customer service, and there could be delays or canceled closings, so ask people you trust about the bank’s reputation.

“You might get a lower rate, but you might never close,” Campion said. “The rate is important, but it’s more important that the loan is personalized to your needs and that you will get the loan in the end.”

Robyn A. Friedman has been writing about real estate and the home market for more than two decades. Follow her @robynafriedman. Send comments to [email protected].