Getting a Mortgage? Why You Can't Just Look at Rates
by Maurie Backman | Jan. 24, 2021
The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.
Image source: Getty Images
You shouldn't accept an offer for a home loan based on its interest rate alone.
The lower the interest rate you pay on your mortgage, the less expensive your monthly payments will be. And keeping your mortgage rate low means you'll pay less total interest over the life of your loan. But while interest rates are an important factor to look at when deciding whether or not to accept a lender's offer, they're not the only thing to consider.
Don't ignore your closing costs
Getting a mortgage isn't free. Rather, you'll have to pay closing costs to finalize your loan. These include things like origination fees, appraisal fees, recording fees, and title searches.
Closings costs generally amount to 2% to 5% of your loan amount. Clearly, that's a big range. They're also somewhat discretionary. Lenders can't control some of the costs -- for example, the fee to record a mortgage is generally established by local governments and is unavoidable. But others are flexible and negotiable. So, if you're shopping around for a mortgage with different lenders, it's important to compare not just interest rates but also closing costs.
Imagine one lender charges you a lower interest rate than another so you'd pay $20 less per month for your loan. That's a big difference. After all, who wouldn't want to save $240 a year? But what if that same lender with the lower rate also charges an extra $2,000 in closing costs? Suddenly, you're not getting the savings you thought you were. You'd need to make payments for 100 months to break even compared to the offer with no closing costs.
Get $150 off closing costs with Better.com Mortgage
This is one of the top lenders we've used personally to secure big savings. No commissions, no origination fee, low rates. Get a loan estimate instantly and $150 off closing costs.
Granted, when you sign a 30-mortgage, you sign up for 360 payments (assuming you don't pay off your home loan early). As such, in this scenario, once you break even after 100 payments, you'd enjoy $20 of savings over the course of 260 payments for a total of $5,200. But that also assumes you don't move or refinance your mortgage during that time. So in this case, you may be better off opting for the loan with the lower closing costs. A lot can happen in the course of 100 months, and you may not even stay in your home long enough to break even.
It pays to negotiate
If you receive an offer for a low interest rate on a mortgage but higher closing costs than what a competing lender is asking for, it never hurts to try to negotiate. If the first lender really wants your business, it may agree to come down on closing costs, especially if you're a strong mortgage candidate with great credit.
That said, some lenders are willing to match each other on rates, so you could always do the opposite, too -- go back to a lender with lower closing costs and ask it to drop its interest rate. There are plenty of options to play around with, but the point is that closing costs should factor into your decision to sign a mortgage just like rates should. Keep that in mind as you submit those home loan applications.
A historic opportunity to potentially save thousands on your mortgage
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
Our expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See our full advertiser disclosure here.
About the Author
Maurie Backman is a personal finance writer who covers everything from savings to retirement to healthcare. Her articles have appeared broadly on major outlets such as CNBC, MSN, and Yahoo.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
