There’s a misconception among homebuyers that banks will advertise their best available rates.
Surprise – they don’t.
The mortgage rate that banks advertise openly is commonly known as the Posted Rate – and although it’s completely negotiable, and rarely used, its the starting place for almost all mortgage conversations and make you negotiate down from there.
It might not seem like a big deal on the surface, but without you realizing it, this gives them a huge competitive advantage.
The big banks seem trustworthy. Most mortgage holders don’t recognize how much negotiation room there actually is their mortgage rate. So they may do some simple negotiations and then just accept what they are offered and in the process unknowingly absorb the additional interest cost.
Few people enjoy negotiating, but the big banks’ posted rate system has made negotiating a requirement because you’ll rarely find the Banks absolute lowest rate published. New home buyers especially are led to believe that they’ve not earned the “right” to receive low-interest rates like experienced borrowers. This is simply not true.
The “Anchoring Principle.”
The strategy they’re using is a powerful negotiation tactic called the “Anchoring Principle.” It plays on a cognitive bias where people rely more heavily on the first bit of information they have.
Put another way, the first price you see influences how much you expect to pay, but for those in the know, it really just leaves us begging to answer, how low will they actually go?
This setup is a bit unfair for the ordinary person looking to getting a mortgage. Since you as a homebuyer have no idea what the lowest mortgage available mortgage rate is, so you’ll have a hard time knowing if a rate offer is reasonable or not.
Advisors who work for banks often get bonuses to keep your interest rate high, with a goal of keeping it as close to the posted rate as they can.
How much of a difference does negotiating make?
The posted rate and your ability to negotiate will make a massive impact on how much your mortgage will cost. Look at how much more you’ll pay when you have a posted rate vs. a fully discounted rate:
The posted rate and your ability to negotiate will make a massive impact on how much your mortgage will cost.
Look at how much more you’ll pay when you have a posted mortgage rate vs. a fully discounted mortgage rate:
|Fully Discounted Rate||Big Bank’s Posted Rate|
That’s potentially $36,750.99 in extra interest over a 5-year term based on a $300,000.00.
Once you qualify with one of the big banks, keep in mind the rate you get is completely determined by your ability to negotiate.
Knowing this, you may think that no one would sign a mortgage at or near a posted rate. But the reality is, we see it every day.
Remember, most banks also have an incentive plan for their advisors that rewards them based on how high they can get your rate. (Ya, we know… it makes us mad too)
If that doesn’t upset you…
JUST WAIT, IT GETS DIRTIER: Even if you get a discount, you can’t relax. If you don’t watch out, the posted rate will be used again when you renew your mortgage and whether you believe it or not, even when you breaking mortgage!
When your term is up and your mortgage is up for renewal (insider slang for selecting a new mortgage term) you will receive a letter from your bank. This letter contains a list of options for your renewal. Each option consists of a term, the associated posted rate (not the available “best” discounted rate) and you as a “client” need to pick one.
This is the banks attempt to get clients to renew at higher rates, with no effort. It’s a win for the bank every time a client signs the Auto-Renewal Letter. They are “banking” on you not shopping around before renewal or hoping that you’re too busy / confused so you’ll just sign it.
Unfortunately, it works really well – and since the posted rate is likely higher than the mortgage rate prior to renewal many clients are surprised and upset when they see a new much larger mortgage payment.
Current statistics put auto renewals at over 82% for big banks.
OUCH, that’s a lot of people paying far too much in interest.
It’s easy to understand that the posted rate is like the MSRP (manufacturer’s suggested retail price), a number that is there to make you feel like you are getting a deal and to try to stop you from asking for more. However, with the “big bank’s” mortgages the posted rate lingers is the fine print and can be found inside your penalty calculation.
That’s right most large banks have a clause in their contract that basically says if you break your mortgage within the term you selected, your mortgage penalty will be calculated using the posted rate (remember this the highest rate the bank charges) instead of the actual interest rate in your mortgage contract.
This is one of the biggest scams in the mortgage industry, and in my opinion (and many more in the industry) the posted rate at the time when you received your mortgage should have no impact on how much your penalty is. The only reason the big banks can continue to use this corrupt calculation is their large market share and consumer complacency.