If you’re in the market for a mortgage today, you may be resigned to the idea of paying a lot to borrow for a home. Mortgage lenders haven’t exactly had many bargains on offer since rates started creeping upward in 2022. As of this writing, the average interest rate on a 30-year fixed mortgage is 6.9%, according to Freddie Mac.
That said, it never hurts to try to negotiate when you’re looking to sign a mortgage. If you gather a bunch of offers from different lenders, you may end up in a position where you can talk a given lender down to a lower rate, especially if you happen to be a borrower with great credit.
But there’s one mistake you don’t want to make when negotiating mortgage rates. It’s an oversight that could really come back to haunt you.
Don’t forget about closing costs
When you think about signing a mortgage, it’s natural to focus on trying to snag the lowest interest rate possible. But there’s another important factor to look at when evaluating your mortgage offers — closing costs.
Closing costs are the fees lenders charge to finalize a mortgage. They commonly amount to 2% to 5% of the loan amount you’re taking on. But that doesn’t mean your closing costs won’t be higher.
And even within that 2% to 5% range, there’s a lot of room for your costs to vary from one lender to the next. So in the course of negotiating mortgage rates, don’t forget to account for the sum you’re paying to close on your loan.
To be clear, you’re not always required to hand over a giant check for closing costs when you put a mortgage in place. Often, lenders will allow you to roll your closing costs into your mortgage and pay them off over time along with the rest of your loan.
But either way, once you commit to those closing costs, there’s no going back. On the other hand, committing to a given interest rate on your mortgage doesn’t always mean paying that rate for 15 years, 30 years, or whatever the life of your loan entails. It’s often possible to refinance a mortgage at some point in time and snag a lower interest rate in the process.
Deciding between two potential lenders
Let’s say you’re stuck between two lenders — one letting you borrow $200,000 over 30 years at a fixed rate of 6.9% and another giving you that same loan at 7%. At first, the 6.9% offer reads like the better deal. With that offer, you’re paying $1,317 a month for principal and interest. With the second offer, you’re paying $1,330 a month.
But what if the lender offering you a 30-year mortgage at 6.9% is also charging you an extra $3,000 in closing costs? Well, let’s do the math.
With the 7% offer, you’re paying an additional $13 a month. And it takes about 231 monthly payments to equal the $3,000 in extra closing costs you may be looking at. That’s over 19 years’ worth of payments.
A lot might happen in 19 years, though. And there’s a reasonable chance you’ll be able to refinance your mortgage to a lower interest rate within that time frame. As such, it could make financial sense to sign the mortgage that has you paying an extra $13 a month rather than spending an additional $3,000 upfront on closing costs.
Look at the whole picture
It’s always important to shop around when you’re looking for a mortgage, so you can compare different offers and negotiate with lenders. But don’t just negotiate your mortgage rate itself. Try to get your lender to come down on closing costs, too.
All told, when comparing mortgage offers, you need to look at the big picture. Signing on with the lender offering you the lowest rate may not be your best option if its closing costs are higher than what the competition is charging you.
