Feb. 22, 2021
There’s an often-overlooked element that affects your mortgage rate: location.
Today’s real estate market, with its rapidly rising home prices, has made it more important to secure the lowest possible mortgage rate to help keep your monthly payments affordable. So you’ll want to understand everything that goes into determining your rate.
There’s a strong personal component to your mortgage rate, but geographical factors — like the prevalence of lenders, housing prices, and local or state laws — also have an affect.
Thankfully, right now is a historically great time for borrowers. In 2020, the average 30-year mortgage rate fell to a new all-time low 16 times, and moved even lower in January 2021 bottoming out at 2.65%. But the average mortgage rates don’t matter. What matters is the mortgage rate you end up with. And there’s a lot that goes into determining that rate.
So when you’re shopping around for a mortgage, these are the other factors not directly related to your personal finances to be aware of.
Yes, Location Does Influence Mortgage Rates
When it comes to determining mortgage rates, geographic factors play a role. But they’ll typically have a smaller impact overall. “Rates are not going to be so vastly different state to state … that it should really impact, in any major way, what kind of house you can afford,” says Erin Sykes, Florida and New York-based real estate agent and chief economist with Nest Seekers International. “We’re not talking about two (percentage) points between states, we’re talking about maybe it being a difference between 2.8% and 3.1%, right now at least.”
But Your Personal Finance Profile Is Still a Big Factor
The rate differences between locations won’t outweigh your personal finances. “You’re never going to fully escape your personal financial situation,” says Sykes. So no matter where you decide to purchase a home, things like increasing your credit score and saving up for a larger down payment will always work in your favor.
Shop around for a mortgage. A study done by Haus showed it’s the single biggest thing you can do to secure a lower mortgage rate.
However, understanding how competition and home prices influence your mortgage rate will help you be better prepared to shop around and negotiate with lenders. And finding the best deal is the biggest thing you can do to secure a lower rate in the short-term, according to a report by the California-based fintech startup Haus. “We found that there is a 75 basis point spread (0.75%) across lenders,” says Ralph McLaughlin, chief economist with Haus. So finding the lender with the lowest rate is important.
Here are the main factors, outside of your personal finances, that can affect your mortgage rate.
Simple supply and demand will play into your mortgage interest rate. “It creates bidding wars when there are a lot of lenders servicing an area,” Sykes says. So purchasing or owning a home where there is no shortage of lenders will work in your favor.
While the prevalence of online lenders will help you find and compare offers, regardless of where you live, the presence of physical offices makes a difference. “We did an analysis last year where we found that local bank concentration also matters,” McLaughlin says. “There was a pretty strong correlation between the number of brick-and-mortar banks in a market per capita, and mortgage spreads. Markets that had a lot more banks per capita had lower spreads, which means that their rates were lower, all else equal.”
2. Loan balance
The size of your mortgage matters, so housing prices in your area can make a difference in your interest rate. “The elephant in the room is loan balance. It costs the same to originate a million-dollar mortgage as it does a $100,000 mortgage, but the million-dollar mortgage is going to make that lender more money,” McLaughlin says.
Mortgages of roughly $350,000 to $500,000 will, on average, have a mortgage rate that’s approximately 0.23% lower than loans with balances of $100,000 or less, according to the same Haus study. The difference in rates between the loan balances is “…lenders trying to cover their cost of origination, because cheaper mortgages don’t make them as much money,” McLaughlin says.
3. Cost of doing business
If a lender has lower fixed costs, then they may have the flexibility to offer lower mortgage rates. “All of the things that make prices increase for anything … will likely impact mortgage rates as well,” Sykes says. So when a bank pays less to keep the lights that should factor in your favor
Other things that can increase the cost of doing business for a lender are foreclosure rates and the laws that impact home loans. “The more foreclosures there are in the area the riskier it is for the lender to lend money,” Sykes says. And how long the foreclosure process takes varies widely depending on state law, which is a cost lender may take into consideration. “States like Connecticut and Florida where your court process can take years, the lenders really have to account for that,” she says.
States and Cities With the Highest and Lowest Mortgage Rates
When it comes to the average mortgage rates of an area, “ … there are a lot of counter balances going on,” Sykes says. So an area with a low cost of doing business may also have lower housing prices and the low mortgage balance could offset the potential savings on your mortgage rate.
According to the Haus study, these are the metro areas (population of 50,000 or greater) with the rates that differ the most from the benchmark rate. NextAdvisor analyzed Zillow mortgage rate data from Feb. 22, 2021, to determine the states with the highest and lowest rates, compared to the national average rate.
5 cities with the highest mortgage rates*
- Sandusky, OH – 0.20% higher
- McAllen, TX – 0.19% higher
- Brownsville, TX – 0.16% higher
- Danville, VA – 0.15% higher
- El Centro, CA – 0.15% higher
5 cities with the lowest mortgage rates*
- Dubuque, IA – 0.23% lower
- Springfield, IL – 0.17% lower
- Lima, OH – 0.17% lower
- Grand Forks, ND – 0.15% lower
- Tie: Elmira, NY; Iowa City, IA; Bismarck, ND – 0.13% lower
5 states with the highest mortgage rates*
- New York – 0.88% higher
- Utah – 0.47% higher
- Connecticut – 0.25% higher
- Indiana – 0.18% higher
- South Carolina – 0.16% higher
5 states with the lowest mortgage rates*
- District of Columbia – 0.13% lower
- Louisiana – 0.12% lower
- Idaho – 0.12% lower
- Hawaii – 0.08% lower
- Ohio – 0.08% lower
Licensed Associate Real Estate Broker (FL, NY & NJ), Nest Seekers Chief Economist, LEED AP