How do I compare different closing costs?

Posted by  on Aug 26, 2012

Q: I'm looking at two different mortgage quotes, one with a slightly lower interest rate, one with lower closing costs. How do I decide which is really going to be cheaper over the course of the loan?

A: A mortgage calculator can help you figure this out, and there are a couple steps to take:

Determine the total interest expense of both loans and compare

Perhaps the simplest method is to run both sets of numbers through a mortgage calculator, and compare the total interest expenses from the resulting amortization schedules. Most loan calculators will tally up the total interest expense and the total loan payments, and you can compare either set of numbers under your two loan scenarios.

If the difference in closing costs exceeds the interest payments you would save with the lower interest-rate loan, then the higher-rate loan with lower closing costs could be the way to go. However, if the extra closing costs are less than your interest savings over the course of the loan, then the lower interest loan may be a better deal.

Factor in the time value of money too

The only problem with the above methodology is that it doesn't account for the time value of money - that is, the money you save on closing costs is more valuable than interest saved in future years because you can put it to work right away. One way to account for the time value of money would be to add their respective closing costs to the loan principal when you run the numbers through a mortgage calculator. This will effectively discount the value of future savings by assigning an interest expense to the upfront costs. If you run the mortgage calculator this way, a comparison of the total loan payments over the course of the loan should give you a feel for which arrangement is actually cheaper.

Note that under this second method, it is important to compare total principal and interest payments, not simply the interest payments, since the difference is closing costs is being accounted for in the principal calculations.

Looking For The Best Mortgage Rates?

Start right here...


Get Mortgage Rates by Email

  • Compare mortgage rates offline
  • Get updated rates in your inbox
  • Apply for a mortgage from your email
  • We don't spam

Get Your Rates Emailed Now!

Subscribe To Lending Lowdown
Your information will never be shared
Shoprate User Survey