Most people would not pay a car dealer the sticker price for a new car. Negotiation is commonly part of buying a car, so the buyer expects to get a substantial discount off the sticker price. These same people, however, think nothing about accepting the first rate that a mortgage broker or bank offers on an Arizona refinance or new home mortgage.
Keep in mind that, mortgage companies, just like car dealers, are in the business to make as much money as ethically possible off each and every loan that they fund. The unfortunate truth is that there are many ways for a mortgage broker to set up your financing that incorporates “costs” without your knowledge.
When you are shopping for an Arizona Refinance Mortgage rate, there are many ways to reduce the overall cost of the mortgage if you know how the broker makes their money and what parts of the mortgage cost is negotiable.
Let's look at closing costs. Some closing costs cannot be negotiated. Such items as credit fees, impound accounts, underwriting fees, title fees, etc, are fixed by other companies, and are beyond the control of your mortgage broker. However, the largest part of closing costs -- points or “origination fees” -- can be substantially lowered by negotiation. Origination fees typically run about 1-3% of the loan amount. Mortgage brokers would like for you to think these are standard fees that everyone pays and there is no getting around them. The truth is that origination fees are pure profit for the broker, and it is possible to negotiate them down to zero or very close to zero.
Never forget this -- the origination fee is an arbitrary fee established by the broker and paid to the broker. Do not let them tell you anything different.
Consider this example: For a $200,000 mortgage, an origination fee of 2% means you will pay $4000. That $4000 is usually added to your mortgage, and increases your monthly payments. If you negotiate points, or origination fees, from 2% down to one half percent, you will save $3000. How do you negotiate for a lower fee? Simple ask the broker to reduce his origination fees or you will take your business elsewhere. Nine out of ten times, the broker will agree without almost no argument. The broker knows he has more profit fat built into the deal with his inflated interest rate. I'll tell you how to save money on that as well.
You can also negotiate your actual Arizona refinance mortgage rate. By reducing the interest percentage, you can reduce your monthly payments by hundreds of dollars each month.
To appreciate how this can be accomplished, you must understand how the mortgage broker makes money on your mortgage rate. Here is what happens when you submit an application to refinance an existing Arizona mortgage or to apply for a new mortgage. A mortgage broker usually works with five to twenty wholesale lenders in order to have a wide selection of loan products to choose from. After the mortgage broker checks your credit rating and other qualifying factors you have provided them, they match your qualifications to mortgages offered by their wholesale lenders.
Generally, the broker chooses the lender that gives them the largest amount of money. On a daily basis the wholesale lender provides the broker a list of interest rates with a corresponding list of how much they will pay for each interest rate. For example, for a mortgage of 5% the wholesaler might not pay the broker anything at all. The rate at which the mortgage broker makes nothing at all is referred to as the "Par Rate". In our example, for making a 5 1/2% mortgage they might pay the broker 1% of the mortgage. For 6 1/2 %, the broker might make as much as 3% of the mortgage amount. (Do not confuse this with the origination fee that we previously discussed because they are completely different.)
Back to our example, you might qualify for a loan rate of 5% at “par“ pricing, but the Loan Officer want's to make as much money as possible so they pad the rate and tells you that your rate is 6.0%. When the mortgage broker quotes you a rate, you will logically assume that you qualified for that rate. But in reality, you qualified for the 5% rate.
The wholesale lender pays the Arizona mortgage company a higher commission because you were charged a higher rate. On a $200,000 mortgage, a 3% commission would pay $6000 to the mortgage broker. Not a bad day's wages.
There are some mortgage brokers that do not believe in making the maximum amount they can. Some, like our firm, place a cap of 2% on all closing costs.
Whatever you do, and whoever you deal with, just remember to negotiate, negotiate, negotiate! For maximum return on your effort, focus on the origination fees and the actual mortgage rate. You will end up saving yourself thousands of dollars.
