Mortgage  Question?
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Choose Mortgage With Lower Rate or Closing Costs?

Should I choose a mortgage with a lower mortgage rate and higher closing costs or a loan with a higher rate and lower costs? My lender provided two mortgage quotes -- one loan has a 0.375% lower interest rate but $2,000 more in closing costs ($8,000 in total). I am looking for a $175,000 mortgage. Which option is best for me?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

When comparing two mortgage quotes, it usually makes financial sense to select the loan with the lowest mortgage rate as long as the closing costs are not significantly higher than your other financing options.  Paying a lower mortgage rate results in a lower loan payment, which means you save money every month over the life of your loan as compared to a mortgage with a higher interest rate.  A 30 year mortgage has 360 monthly payments so even if you only save $20 per month, that adds up to $7,200 over the course of your mortgage.  So while paying a lower mortgage rate may cost you more money upfront in higher closing costs, you could save a significant amount of money in the long run.

For example, the monthly payment on a 30 year $175,000 mortgage with a 4.000% rate is $835 while the monthly payment on a loan with a 4.375% rate is $874. In this case, you save $39 dollars a month by selecting the mortgage with the lower interest rate, which is $14,040 in total savings over the 30 year mortgage ($39 savings per month x 360 monthly payments = $14,040).  If the difference in closing costs between the two mortgage proposals is $2,000, you recover the extra costs you paid upfront in approximately 51 months, or four and a quarter years, ($2,000 in extra closing costs / $39 savings per month = 51 months or ~ 4 years and three months).

I recommend that you use our Mortgage Comparison Calculator to compare loans with different interest rates and closing costs to help you decide the loan that is right for you.

This example also shows how the length of time you plan on owning the property factors into the decision process.  In this scenario, if you plan on owning the home for at least four and a quarter years, then the loan with the lower mortgage rate and higher closing costs makes more financial sense because you can recover the higher costs you paid with your monthly savings. If you plan on selling the home sooner, then the loan with the lower closing costs and higher mortgage rate is likely the better option because you are not going to own the property long enough to justify the higher costs.  So when you compare mortgages there are other factors to consider in addition to interest rates and closing costs.

In addition to how long you intend to own the property, there are other practical considerations to keep in mind including how much money you have saved for closing costs.  If you have limited funds it may not be feasible for you to pay higher closing costs to benefit from a lower mortgage rate.  Closing costs can run thousands of dollars plus we recommend that you keep sufficient funds in reserve to pay for three-to-six months of total housing expense in case you encounter financial challenges after your loan closes.  In an ideal scenario you have enough money in savings to pay the higher closing costs but this may not be an option for all borrowers.  So in some cases, the decision of what mortgage proposal is better for you is made for you based on your financial situation.

 In an ideal scenario you are able to select the mortgage with the lowest rate and fees.  The best way to do this is to shop multiple lenders.  I recommend that you use our lender tables below to see if you can find better loan terms including a lower combination of mortgage rate and closing costs. To make sure that you compare a wide range of financing options we advise you to contact at least five lenders.

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Current Mortgage Rates as of July 16, 2019
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  • APR
  • Loan Type
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View All Lenders

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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

You can also use our Personalized Mortgage Quote feature to receive no obligation mortgage quotes from leading lenders.

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%
Current Mortgage Rates as of July 16, 2019
  • Lender
  • APR
  • Loan Type
  • Rate
  • Payment
  • Fees
  • Contact
View All Lenders

%

Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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