Business Costs And Competition Affect Your Final Rate
Answering the question “what are today’s rates?” is not as simple as it sounds.
Rates vary by the hour, and by the applicant. A mortgage rate and fee structure is almost as unique as a fingerprint.
Credit score, loan type, and downpayment are just a few of the factors that determine the rate a consumer secures for a home purchase or refinance.
But those aren’t the only factors that affect rates. Where you live also matters.
Mortgage rates and costs vary between states, and even multi-state lenders don’t quote the same rate and closing costs everywhere they lend. The cost of doing business and even competition among lenders play into the final rate on your mortgage.
Fortunately, local factors don’t affect rates as much as macro forces — things that set rate levels on a national level. You wouldn’t get a 5% mortgage in New York City and 3.5% in Dallas, Texas, for instance.
And by shopping around, you can find a competitive rate no matter where you live.
Rates Driven By National Forces First, Local Factors Second
At a national level, mortgage rates are driven by the price of mortgage-backed securities (MBS).
What are those? They are financial instruments that include a group of mortgages.
It’s a somewhat-flawed comparison, but you could think of MBS is this way:
MBS are to individual mortgages as mutual funds are to individual stocks.
Investors have no interest in buying someone’s individual mortgage, but they will invest in a fund made up of a group of mortgages.
As economies wane, investors enthusiastically seek the relative security of MBS. As the economy soars, investors would rather make higher returns in the stock market and other investments.
Nationwide demand for MBS have the greatest effect on mortgage rates. And right now, rates in every town and city are very low. But local variables do come into play. State economies, foreclosure laws, and property values can impact the consumer’s final rate.
Your Local Economy Affects Your Rate
Homeowners don’t like foreclosures, but it’s a lesser-known that lenders and servicers hate them almost as much.
Foreclosures cost the lender money, time, and the goodwill of its customers.
And foreclosures force lenders to charge higher rates.
A state’s economic health influences its mortgage foreclosure rate – a key variable for mortgage lenders who do business there.
Daily Finance’s Douglas A. McIntyre noted in his article, Freakanomics and the Great Recession that, “Unemployment is the single greatest cause of high foreclosure rates and falling home prices. The correlation between cities with high jobless rates and extremely high foreclosures is stunning.”
During the Great Recession, high unemployment spiked foreclosure rates and increased costs for mortgage lenders in the hardest-hit states.
This led the Federal Housing Finance Agency (FHFA), which regulates the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, to add an “adverse market” surcharge to GSE mortgages in states with high foreclosure rates.
This charge was eliminated in 2015, once housing markets had sufficiently recovered.
Today, the states with the highest foreclosure percentages are as follows.
- New Jersey
- Nevada, Delaware
Indiana, Pennsylvania, and South Carolina are also on the list, according to real estate data website RealtyTrac.
Mortgage consumers in these states could pay higher rates as lenders compensate for higher foreclosure potential.
Tough Foreclosure Laws Increase Lending Costs
The Federal Housing Finance Agency reported in 2013 that the length of time it took to complete a foreclosure can vary by as much as 610 days between states. Further, “states with long foreclosure timelines impose much greater total carrying costs in cases of default than do other states.”
Some states require “judicial foreclosure,” which means lenders have to go through the court system to foreclose on a mortgage and sell the property. This takes longer and increases the costs for mortgage lenders in those states, forcing them to charge more.
States with some form of judicial foreclosure requirement include:
In all, more than 22 states require judicial foreclosures.
Other states allow non-judicial foreclosures, which means lenders do not have to go to court to foreclose.
It’s debatable whether non-judicial foreclosures are the best for affected consumers. But they do cost lenders less, which translates to lower mortgage rates in those states.
Mortgage Rates Reflect The Cost Of Doing Business
Have you ever purchased a gallon of milk on Hawaii? It will run you up to $9 according to news station Hawaii News Now.
The price reflects the cost of bringing the product to market. The same principle applies to mortgage rates.
Costs of doing business can vary significantly between states. For example, several states require mortgage lenders have a brick-and-mortar presence in order to finance local properties. Rents and property taxes also come into play. An office in Manhattan is going to require more overhead than one in Boise, Idaho. All these costs are passed on to the consumer.
CNBC ranks U.S. states every year for business-friendliness. The states with the highest cost of doing business in 2015 were Hawaii, California, Maryland, Connecticut, Massachusetts, Rhode Island, New York, New Jersey, Vermont and Alaska.
If you live in one of these states, there’s no need to worry. Another factor could come into play in more expensive, highly populated areas: competition.
Competition Among Loan Officers Can Lower Your Rate
A recent study by Pennsylvania State University concluded that consumers can get the lowest rates in the competitive markets.
Mortgage lenders trim their profit margins and drop their prices when lenders abound in an area.
When there are fewer lenders competing for business, rates tend to be higher, according to a study by the University of North Carolina, Wilmington. Metropolitan areas with the highest concentration of lenders, according to the U.S. Bureau of Labor Statistics are Chicago, Illinois, Phoenix, Arizona, and New York, New York. The following cities also made the list of most competitive for lenders.
- Los Angeles, California: 15,840 loan officers
- Dallas, Texas: 9,350 loan officers
- Washington, DC: 6,580 loan officers
- Charlotte, North Carolina: 4,810 loan officers
- Tampa, Florida: 4,510 loan officers
High-population cities are generally more expensive than small towns. But when shopping for mortgage rates, the opposite might be true.
What Are Today’s Rates?
Mortgage rates are low even if you live in an area with higher-than-average rates. Rate differences between states and cities can be compensated for by shopping around and getting 3 to 4 quotes from various lenders.
Get a quote for your home loan now. You don’t need any documentation to start the process, and you can have a quote in minutes.