Huge shoutout to @roamingtrader on this one! It had been a long time since I purchased my first property. A huge step in this process is finding a lender and understanding associated costs.
Everything Is Negotiable, Don’t Be Fooled
Here is the first thing that is critical to understand. Rates are negotiable. Always. Don’t let a lender lead you to believe the rate they are offering is the best they can do. That is not the case.
At the beginning of the process of identifying a lender, I went the first person who returned my calls. This lender was super ecstatic to send me over details and get me locked in at a rate. Little did I know that their eagerness was due to getting a horrible rate. Luckily that is where @roamingtrader came in with some incredible advice!
Sometimes You Make Your Own Luck
By chance of luck, @roamingtrader asked me what rate I was getting. When I told him 5.75% I thought he was about to flip out. He looked up going rates for investment properties and let me know I could do better. With that in mind I started shopping around for new rates.
Another critical piece of advice. Be careful on what you sign. There are certain things with lenders you must sign to lock in rates. Be sure this isn’t signing you up to be with that lender. You have up till roughly three weeks before closing to identify your final lender. Shop around. And don’t stop shopping.
Understand What The Lender Controls Versus What Is Consistent Across Every Lender
The next thing you need to understand is what a lender can and cannot control. The two main things the lender has control over are the interest rate and origination points. The interest rate is straightforward. Origination points are a little different.
My understanding of origination points are as follows. The origination fee is something the lender charges you for putting the loan in place. They could also charge points to buy the interest rate down. One point equates to 1% of the loan amount. If you are taking out a loan on $100,000, 1 point will cost you $1,000.
Being able to compare different lenders against each other becomes difficult. This is driven by each lender having their own fee sheet format. I ended up creating my own consolidated excel document to compare apples to apples.
Again, your focus should be on interest rate and points. I started off locked in at 5.75% interest rate. I was going to be getting a loan for $156,800. That loan at a 5.75% interest rate would cost me $172,615 in interest on a 30 year term. Dang! That is a lot of interest.
I started negotiating and finding other lenders. I started speaking to 5 different lenders. There was one incredible thing that amazed me. Whenever I told a lender I got a better price somewhere else, they immediately matched it. Without batting an eye. I couldn’t believe what was happening. I was having lenders negotiate against each other. I was viewing this whole process wrong from the beginning. I was thinking I needed to sell the lender when the reality was the exact opposite.
After a week of going back and forth with a few lenders, I the final offer I landed on was a 4.625% interest rate. At 4.625% interest, I would be paying $133,421 in interest of the course of the loan. This was at a one point origination fee. The drop from 5.75% to 4.625% will end up saving me $24k of interest! All coming thanks to @roamingtrader and better understanding how this game works.
One other huge win of the interest rate dropping, the principal also dropping! When you go from a 5.75% interest rate to a 4.625% the monthly P&I drops from $915 to $804. Bring on that cashflow!
Key Takeaways:
- Everything is negotiable. Don’t let a lender tell you otherwise.
- A lender can mainly control the interest rate and origination points (fees) for coming up with the loan.
- Not only do you win in the amount of interest saved over the course of the loan, you also can greatly reduce your monthly P&I payments!
