A Low Mortgage Rate Can Cost You More Than a High One

Borrowers shopping for a mortgage tend to compare interest rates first, treating the lowest number as the best deal. But that instinct can backfire when a lower rate requires thousands of dollars in upfront fees to secure – fees that many homeowners never recoup before they sell.

Sam Verma, who founded Cohivra, Inc., a mortgage operations and technology firm, has spent over 30 years in the mortgage industry. She says the most common misunderstanding she encounters among borrowers is the belief that the rate is the only number that matters.

“It’s not about just the rate; it’s about how much the fees are as well,” Verma said.

How Buydowns Change the Math

A lender might offer a rate that looks sharply lower than a competitor’s quote. But that lower rate may require a significant upfront payment – known as a buydown – to purchase the reduced interest rate for the life of the loan.

Verma points to a scenario she sees regularly: a borrower secures a noticeably lower rate but pays thousands of dollars at closing to get it. The question nobody asks, she says, is whether they will live in the home long enough for the monthly savings to exceed that upfront cost.

“You can get a 5% rate, but you have to pay $20,000 to buy down the rate,” Verma said. The borrower has to consider whether they actually have that cash on hand, whether it raises the overall mortgage payment when folded in, and whether they will recoup it before they move.

The Five-to-Seven-Year Problem

According to Verma, most homeowners do not stay in one home for decades. “An average homeowner only lives in their house – so five to seven years,” she said.

If a borrower buys down a rate and then sells before the cumulative monthly savings equal what was paid upfront, the buydown was a loss. The borrower would have been better off with the higher rate and lower closing costs.

This is not a rare scenario. In Verma’s experience, it is the most common one. Buyers compare rates, pick the lowest number, and never calculate the total cost over their actual expected ownership period. They walk away from closing thinking they got a bargain.

What Borrowers Miss

The more useful comparison, according to Verma, is the total cost of a loan over the period someone actually expects to own the home. That means adding closing costs and fees to the monthly payments made before selling.

A slightly higher rate with substantially lower fees can cost less overall for someone who plans to move within a decade. A slightly lower rate with steep buydown fees can cost more.

Verma says many borrowers focus entirely on the rate they were quoted and only later realize how much they paid in closing costs. “Then they paid so much more money in closing costs,” she said. The rate looked like a win, but the total expense told a different story.

A Market Where Fees Hit Harder

Verma notes that the current rate environment makes these cost miscalculations more consequential. With rates running near 7% – compared to the 2.5% to 3% rates available during the pandemic – monthly payments have roughly doubled on comparable homes. “People who could afford a $200,000 home then cannot afford the same house today,” Verma said.

In that environment, borrowers stretching to afford a home have less room to absorb thousands of dollars in buydown fees without straining their finances elsewhere. That upfront cost is money you can’t recover if plans change.

The loan with the lowest rate is often not the loan with the lowest total cost. In Verma’s view, running that math over a realistic ownership window – rather than reaching for the lowest rate on the sheet – is the calculation most borrowers skip and the one that matters most.