It can be very tempting when you find an interest rate that is less than what you are paying on your existing home loan or an interest rate that looks so much lower than what another lender is offering but you need to beware.
All that glitters is not necessarily gold.
A common marketing tool used by lenders is to display an introductory rate that is well below the normal rate but this comes at a cost.
One lender currently offers the following rates:
- 5.54%
- 5.74%
- 5.34%
- 6.14%
- 5.13%
- 5.24%
There’s no question about which interest rate looks the most attractive – it’s definitely the lowest interest rate of 5.13% but let’s compare the interest and fees over a 30 year term for a loan of $250,000.
| Initial Interest Rate | Total Interest Paid | Total Fees Charged | Total of Fees and Charges | Extra |
|---|---|---|---|---|
| 5.24% | $246,096 | $60 | $246,156 | N/A |
| 5.74% | $254,738 | $755 | $255,493 | $9,337 |
| 5.54% | $262,946 | $355 | $263,301 | $17,145 |
| 5.13% | $265,437 | $60 | $265,497 | $19,341 |
| 5.34% | $284,062 | $755 | $284,817 | $38,661 |
| 6.14% | $297,427 | $755 | $298,162 | $52,006 |
The end result is that the product with the cheapest rate only manages to come in fourth when you look at the loan over 30 years by and will cost you more than $19,000 extra over the life of the loan.
Luckily, the software that we use lets us work through this.
