We’ve seen our share of home negotiators beat up the other side over a few thousand dollars under the guise of getting the best deal. Is that a good practice for home buyers? Many prospective buyers get into a competitive position when negotiating with sellers and miss out on larger issues that have a bigger effect on the overall cost of their purchase.

When negotiating for a home, buyers should remember that it’s not a two party negotiation (buyers and sellers). It’s at least a three party negotiation (buyers, sellers, mortgage rate). Most buyers simply forget about the interest rate variations and focus on the seller’s concessions (price, inclusions, etc). Perhaps it’s the one on one nature of negotiating with ‘the other side’, which is easier to focus on than an anonymous corporation and an ever moving bank rate.

In my local market, the interest rates have wandered one quarter of one percent in the week. If buyers are not focused on these nominal rate movements and the timing of their rate lock, they are not considering a pricey component of their purchase. While 1/4% is not a particularly alarming swing, what does it mean?

Let’s compare a purchase where the buyers and sellers are $5,000 apart and spend a week splitting the difference, which delays attorney review and their rate lock. If we compare a $500,000 mortgage at 5%* to a $497,500 mortgage at 5.25%, we would find that a quarter percent increase $23,000 more expensive over the life of the loan, for a net loss of $20,000.

Should a buyer be fixated on that last concession? Are buyers cognizant of interest rate movements at the quarter of one percent level while in the heat of negotiations? How many buyers won or split the $5,000 battle but lost the $20,000 war and didn’t even realize it? Although interest rates are set to increase over time, that quarter of one percent could easily drop this week, go back up the following, etc.

Buyers should keep in mind all the elements that make up their total cost of ownership and not treat any negotiation as a personal two way contest. Buyers should also get their financing in place earlier in their home selection process so their lender can give them daily updates on rates. This will help them get a feel for the saw tooth nature (up and down) of interest rates and help them time better.

The numbers:

*30 year conventional.