No, "Terror of the Zygons" is not overrated. Not even slightly. In fact, I'd go as far as saying that its reputation isn't high enough! What more could you want out of a "Doctor Who" story? "Terror of the Zygons" has superb monsters, superb acting from the regulars and guest stars, the Brigadier, a wonderful and very funny script courtesy of Robert Banks Stewart (also responsible for the great "Seeds of Doom"), fantastic production work, great locations, excellent, creepy design work on the Zygon ship, and even the Loch Ness monster.
Well, virtually the only flaw I can think of here is Nessie. Er, it's not a very good-looking puppet. This rubbish monster design is more than made up for by the spectacular Zygons, one of the most memorable and awesome (and I mean that in the classic sense of the word, they genuinely inspire awe) monsters the classic series ever had. Why they never returned on television is a mystery, and I actually think the new series could benefit from their return, particularly with Steven Moffat in charge in 2010. The Zygons are great monsters, their sucker-covered appearance is a bit disturbing, as are any scenes with them killing someone, but design is not all that their success rides on. This script makes the monsters genuinely detailed, they're not just ugly-looking things which show up and get defeated by the Doctor, they're actual characters with motives and a reason for existence. They also have a pretty neat and novel weapon, don't they? Also, the Zygon spaceship is for once appropriately alien, especially the creepy, fleshy controls.
The direction by Douglas Camfield is absolutely superb. In fact, with better effects, "Terror of the Zygons" could hold its own against the best monster features out there; it's one of the most cinematic "Doctor Who" stories there are, thanks to the extensive location shooting, which I believe was done on film as per the BBC standard (video for indoor shooting, film for outdoor shooting, although "Spearhead from Space" was shot entirely on film). I don't think this was shot in Scotland, but it's convincing enough. The guest performances are all excellent, but special mention goes to the wonderful John Woodnutt, and of course to Nicholas Courtney and John Levene as the Brig and Sgt. Benton respectively.
"Terror of the Zygons" benefits from a superb cast, with even the regulars performing better than usual (and the standard at the time for that was certainly quite high), extensive location work, excellent direction and an absolutely superb script. One of the all-time greatest "Doctor Who" stories, for sure.
10/10