Why Shopping Interest Rates Can Cost Real Estate Investors Thousands
As a mortgage broker and banker, I often hear clients say they are “shopping” interest rates. That idea is a bit ironic, because my full-time job, 50+ hours a week, 5 to 6 days a week, is exactly that. I shop rates and products every day, so I am pretty good at it.
That said, I understand the sentiment. I see this behavior most often with new and inexperienced investors, which is why I wanted to write this post. The goal is to help newer investors avoid some of the most common pitfalls I see every day. Many real estate investors make mortgage decisions based solely on interest rates, without understanding how loan structure and program choice affect long-term returns.
As a caveat, experienced investors rarely shop lenders the way newer investors do. They usually have one or two lenders who specialize in certain products, keep their documents up to date, and focus on getting deals closed efficiently. Over time, they learn to value convenience, experience, and execution more than chasing the lowest possible number on paper. Those relationships often take years and multiple transactions to cultivate.
Below are the three biggest mistakes I see new investors make when shopping for a loan
Mistake #1: Focusing on Interest Rate Instead of Total Loan Cost
This is the most common mistake by far. Interest rate alone does not tell the full story, because banks and brokers use a variety of pricing structures to make their rate appear more attractive. If you look at the rate in a vacuum, you will almost always miss what actually matters.
For example, I may tell you that today your rate is 7 percent. Another lender might say they can get you 6.75 percent. On the surface, the second option looks better. But unless you are comparing a full, locked Loan Estimate, you are not actually comparing the loans.
If the 7 percent loan has no points and the 6.75 percent loan has one point in cost, then the comparison is incomplete. You would need to come back and ask what rate the 7 percent loan would be if you paid one point. That rate might be 6.5 percent. Suddenly, the entire comparison changes.
So how do you cut through the noise and identify the true base rate? Ask the lender what their par rate would be for that product if it were borrower paid compensation. This strips out lender compensation and add-ons and shows you the actual base pricing. Some lenders will not love this question, but it is one of the cleanest ways to compare apples to apples. You should also compare processing fees, underwriting fees, and any charges listed in Section A of the Loan Estimate. Those fees can vary significantly and often matter more than a small difference in rate.
Key takeaway: The lowest advertised interest rate is often not the lowest-cost loan once fees, points, and lender compensation are factored in.
Mistake #2: Why Experience and Relationships Matter When Choosing a Mortgage Lender
I have had clients switch lenders over $500 in fees. More often than not, they end up coming back later to fix the deal after realizing that you get what you pay for, even in lending. While we price competitively, we do not compete in the race to the bottom. Many ultra-low-cost lenders operate on a pure volume model. Our approach is different. We focus on advising, relationships, and tailored solutions.
We help clients avoid pitfalls, connect them with the right people, structure their portfolios, and think strategically about growth. We are investors first, and we remember how frustrating lending can be when you are starting out. Because of that, we aim to be coaches, cheerleaders, and trusted advisors, not just transaction processors.
A simple analogy is the difference between a Motel 6 and a Hilton. Both give you a place to sleep. One offers a cheap room and microwaved waffles. The other greets you at the door, provides guidance, and delivers a higher level of service throughout your stay.
When you are making a multi-hundred-thousand-dollar investment, do you really want the cheapest person in your corner? Would you choose the cheapest accountant, the cheapest wealth advisor, or the cheapest surgeon? The reality is that most lenders fall within a relatively tight range on rates. Many investors would gladly pay $500 to $1,000 more for better advice, communication, follow-up, and execution.
Just as investors look for real estate-friendly CPAs or investor-focused agents, they should also look for experienced loan officers who buy what they sell. Do they just offer DSCR loans, or do they personally use them? Are they willing to say hard things like, “I am not a good lender for this program, you should go to...” or “That seller carry on a residential transaction is not actually possible in the lending landscape of today”?
Find a lender you trust, who does a lot of transactions similar to yours, and who is willing to give honest guidance, even when it is not what you want to hear.
Key takeaway: Paying slightly more for an experienced, investor-focused lender often saves time, stress, and costly mistakes on large investment decisions.
Mistake #3: Choosing the Wrong Loan Program for an Investment Property
This mistake is huge and surprisingly common. Investors need to analyze loans holistically, not in isolation. One of the clearest examples of this is comparing conventional loans to DSCR loans. Consider a self-employed borrower who earns $300,000 in gross business revenue, with $200,000 in net profit. They have been in business for years, live in a primary residence they plan to keep for at least five more years, and want to purchase a rental property. After reviewing the numbers, the lender determines the borrower needs to show $150,000 in income to qualify for a conventional investment loan on a $500,000 property. In California, that income level would result in approximately 23 percent ($34,500) in federal taxes and $13,950 in state taxes, for a total tax bill of $48,450. Assume the borrower takes out a $400,000 mortgage at 7 percent. The monthly principal and interest payment on a 30-year loan would be about $2,661. Now compare that to a DSCR loan at 7.75 percent. The monthly payment would be roughly $2,866, or $205 more per month. On an annual basis, that is $2,460 more in interest.
At first glance, the DSCR loan looks worse. But here is where holistic analysis matters. Because DSCR loans do not rely on personal income, the borrower no longer needs to show $150,000 in taxable income. After reviewing expenses with their CPA, the borrower may be able to reduce taxable income to $85,000. At that level, federal taxes would be around $10,200 and California state taxes about $7,905, for a total of $18,105. That is a tax savings of more than $30,000 compared to the conventional loan scenario. The borrower pays $2,460 more per year in interest, but saves roughly $30,000 in taxes. That results in a net benefit of approximately $27,885, even though the DSCR loan carries a higher interest rate.
This scenario is extremely common. While the numbers here are simplified for illustration, these are real conversations we have with clients and their CPAs all the time. The surprise usually comes when everything is laid out clearly on paper. We know this works because we do it ourselves. As commission-based lenders with real estate-friendly CPAs, we often choose DSCR products for our own investments for exactly these reasons.
Key takeaway: Choosing the right loan program can matter far more than the interest rate and, in many cases, can save investors tens of thousands of dollars.
Final Thoughts
Interest rate alone is rarely the most important factor in an investment loan. Structure, program selection, tax strategy, and execution often matter far more.
Work with lenders who understand the products you are using, have a wide range of options, and are willing to look at the entire picture. The right loan is not always the one with the lowest rate. It is the one that best supports your long-term investment strategy.
Ready to take the next step toward homeownership or refinancing? Contact our mortgage team today to explore your options and get personalized guidance you can trust.