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You are here: Home / Home Buyer Resources / Home Buying Myths / Myth – Always Choose the Lowest Interest Rate

Myth – Always Choose the Lowest Interest Rate

There are many factors that go into determining the ‘stated’ interest rate on a home loan. Private mortgage insurance (PMI), the term of the loan, the type of loan (fixed, adjustable, interest only), and the fees or “points” paid at closing can all impact the interest rate greatly.

The table below illustrates a line by line comparison between two different loan programs where the loan with the lower interest rate would actually result in a higher monthly payment amount:

Program FHA Conventional
Home Price $ 400,000 $ 400,000
Down Payment 3.5% Down 5% Down
Current Value $ 386,000 $ 380,000
Upfront PMI $ 6,755 no upfront
Financed Amount $ 392,755 $ 380,000
Interest Rate 4.13% 4.50%
P&I Term (months) 360 360
Principal & Interest $ 1,903 $ 1,925
Monthly PMI $ 434 $ 174
Hazard Insurance $ 67 $ 67
Property Taxes $ 328 $ 328
Total Payment $ 2,733 $ 2,494

Another factor to consider when selecting a loan is the ability of the lender to process the loan in a timely basis so you can complete the home purchase based on the timelines stipulated in the home purchase contract. While not always the case, if a lender has an interest rate or loan program that sounds too good to be true, they may have delays finalizing your loan on time which can potentially lead to your inability to complete a purchase which could cost you $1,000 to $2,000 after you have paid for an appraisal and the necessary inspections.

As a buyer, you have the responsibility to ensure that you are getting quotes from lenders based on “apples” to “apples” comparisons. If you are not making sure all of these factors are what you need in a loan and are the same from lender to lender, you may end up with the lowest interest rate BUT either a higher monthly payment or additional thousands of dollars needed at the time of your loan closing.


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