If you've never bought a home before, when you first start shopping for a mortgage it might seem like the obvious way to choose a lender is to pick the one that offers the lowest interest rate. After all, the interest rate on your mortgage will affect both your short-term and long-term financial well-being because it will determine your monthly mortgage payment and the total amount you'll pay for your home.

Little Things Make a Big Difference
Consider this example: Take out a $200,000, 30-year mortgage at 6.5% interest and you'll pay $1,264.14 a month and $455,090.40 (plus your down payment) over the life of the mortgage. Take out that same 30-year mortgage at 5.5% and you're looking at a mortgage payment of $1,135.58 and a total cost of $408,808.80, or a savings of $128.56 a month and $46,281.60 over 30 years. Even small differences in interest rates, like 6.5% versus 6.2%, can make a big difference. In this case, the 6.2% mortgage rate would save you $39.20 a month and $14,112 over 30 years.

However, taking out a mortgage is a major financial decision, and one that, especially for first-timers, is fraught with potential pitfalls. Just as you consider more than just the sticker price when you shop for a car because factors like safety, fuel economy and reliability are also important, interest rate is only one thing you should consider when shopping for your mortgage. (Learn more about finding the right mortgage in First-Time Homebuyer Guide and Shopping For A Mortgage.)

Why Low Interest Rates Aren't Always a Bargain
Here are some of the other factors you should consider and why they matter.

  1. Teaser Rates
    These attractively low advertised interest rates are often just a way to get you in the door. The truth about mortgage rates is that they change multiple times a day. If you contact a lender based on a rate they've advertised, the odds of you actually getting that rate are slim.

  2. Fees
    There are many costs associated with taking out a mortgage besides the interest rate, like closing costs. Just as the grocery store tries to get you in the door by advertising a gallon of milk for $2 but then wants to charge you $5 for the cereal to pour it on, a bank might advertise a lower interest rate than its competitors but then expect you to pay double the closing costs you might pay elsewhere. Points are another area where lenders can make up for low interest rates by charging borrowers higher fees. However, information on fees isn't likely to be available up front - the only way to find out about these costs is to talk to a lender and have them prepare a good faith estimate for you. (Learn more about avoiding extra fees, read Watch Out For "Junk" Mortgage Fees.)

  3. Type of Loan
    What type of loan you qualify for will affect your interest rate. That great mortgage rate that you see advertised might be for a 15-year fixed conventional mortgage, but your income and savings might only qualify you for a 30-year fixed FHA mortgage, which will have a higher interest rate and a higher long-term cost. (Read Understanding FHA Home Loans to learn more.)

  4. Location
    Where you live also impacts mortgage rates. One of the first questions any lender will ask you is the zip code where you plan to purchase property. The national average might be 5.41% on a 30-year fixed, but the average rate in New York City might be 5.49% while the average rate in San Francisco might be 5.33%.

  5. Credit Score
    The best advertised rates only go to borrowers with the best credit scores. The further below 720 your credit score is, the less likely you are to get a rate similar to the advertised rate.

  6. Lending Institution Reputation
    Just because you've never heard of a particular lending company doesn't mean that it's up to no good, and just because it's a nationally recognized name doesn't always mean it's a safer choice. Regardless of the lender you're considering, do some research to determine how likely you are to get a fair deal when working with that company. The lender who advertises the best rates is not always a lender who will give you a fair deal.

  7. Loan Representative
    At least as important as your choice of lending institution is the specific person you work with in that company. Unscrupulous people can work for stellar companies, and people who always put their customers' best interests first can work for shady institutions. This is why the specific person who handles your mortgage for you needs to be someone you trust. Whether this person is competent and ethical in qualifying you for a mortgage, selling you a particular mortgage product, and preparing your mortgage paperwork will have a major impact on your life.

    Just ask the people who ended up with mortgages they didn't understand and ultimately couldn't afford and today have foreclosures blemishing their credit reports and are back to renting or even living with relatives to get by. They all probably wish they had looked at more than just the interest rate when they took out their mortgages. (What looks like a good deal often amounts to hidden costs. To learn how to find and avoid them, read Score A Cheap Mortgage.)

Mortgage rates change multiple times a day, and they vary depending on your geographic location, the type of loan you want and your credit score. Perhaps most importantly, they don't tell the whole story about the cost of a loan. A mortgage lender might advertise a great rate, but charge a ton of money in closing costs, or promise a borrower great terms, but then present different numbers in the paperwork at closing when emotions are running high and time is of the essence. Looking at the whole loan package, not just the interest rate, will help you get the best deal.

Follow us on Twitter.

Related Articles
  1. Credit & Loans

    HARP Loan Program: Help for Underwater Mortgages

    If you are underwater on your mortgage, this program may be just what you need to help build up equity in your home.
  2. Insurance

    6 Reasons To Avoid Private Mortgage Insurance

    This costly coverage protects your mortgage lender - not you.
  3. Credit & Loans

    Pre-Qualified Vs. Pre-Approved - What's The Difference?

    These terms may sound the same, but they mean very different things for homebuyers.
  4. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  5. Home & Auto

    9 Things You Need To Know About Homeowners' Associations

    Restrictive rules and high fees are just some of the things to watch out for before joining an HOA.
  6. Credit & Loans

    Adjustable Rate Mortgage: What Happens When Interest Rates Go Up

    Adjustable rate mortgages can save borrowers money, but they can't go into it blind. In order to benefit from an ARM, you have to understand how it works.
  7. Taxes

    Before You Visit Your Tax Preparer: Do This

    The earlier you start preparing your tax records and documents, the more likely you are to have a smooth tax return experience – and all the tax benefits you're due.
  8. Markets

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  9. Economics

    What to Expect From Mortgage Rates in 2016

    Understand the factors that influence the direction of mortgage rates, and use this information to project what will happen with rates in 2016.
  10. Investing Basics

    How To Efficiently Read An Annual Report

    Annual reports are clearly prepared without any intent to deceive or mislead investors. Still, investors should read them with a dose of skepticism.
  1. How many FHA loans can I have?

    Generally, the Federal Housing Administration (FHA) does not insure more than one mortgage per borrower. This is to prevent ... Read Full Answer >>
  2. Are FHA loans assumable?

    Loans insured by the Federal Housing Administration (FHA) on or after Dec. 15, 1989, are assumable by qualifying borrowers. ... Read Full Answer >>
  3. How accurate are online mortgage calculators?

    Online mortgage calculators are accurate to the extent that the calculator itself is asking for the right pieces of information ... Read Full Answer >>
  4. Are mortgage rates negotiable?

    Mortgages are just as negotiable as any other product or service. Whether it's a new home purchase or refinancing of an existing ... Read Full Answer >>
  5. Are FHA loans fixed?

    An FHA loan is a mortgage loan backed by the government that offers more flexible lending requirements than those of conventional ... Read Full Answer >>
  6. Does an FHA loan require a down payment?

    Federal Housing Administration (FHA) loans require down payments, which can be as low as 3.5% of the total purchase price ... Read Full Answer >>
Trading Center