Mortgage rates are often the most worried about factor on any mortgage. Whether you purchase or refinance a home, you always want the lowest rate. Before you put too much emphasis on this factor, though, understand there are other things you should worry about. Things like the closing costs, APR, and term all play a factor in the affordability and stability of your loan. Believe it or not, 0.5% difference in your interest rate does not have that large of an impact on your overall payment. As you look at rates, though, you may notice that they differ by area and there could be a distinct difference from state to state.
Many Factors Involved
Mortgage rates are not determined by how the lender feels that day. There are many outside factors that play a role. If you asked for a quote from the same lender 3 times in one day, chances are you would receive 3 different quotes – that is how often they change! Of course, your personal factors make a difference as well. A higher credit score and lower debt ratio will usually net you a lower rate than a lower credit score and higher debt ratio. Your loan-to-value ratio also plays a role. The more you borrow, the higher your rate becomes. Basically, lenders base it on your level of risk. The riskier you are, the higher interest rate you pay.
The Basic Driving Factor of Mortgage Rates
Across the country, you will find similar interest rates – not identical rates. You won’t find a 2% difference from state to state, for example. There are national factors that play a role. Mostly, the performance of mortgage backed securities affect interest rates. Mortgage backed securities are bundles of mortgages that investors purchase. They often turn to these investments when the economy is not doing well. Mortgage backed securities are less risky than stocks, which is why investors turn to them during bad times.
Your State Affects Mortgage Rates
Once you have the basic interest rate throughout the country, there are state specific factors that may change things. For example, some states are just more expensive to live in than others. These states have higher costs on everything from grocery to services. These higher costs naturally cause higher interest rates. It wouldn’t help banks to do business in these areas if they could not charge the higher rates. Banks have overhead and need to make a profit too. A few of the most expensive states to live in include Hawaii, New York, California, and New Jersey. Among the least expensive states to live in Iowa, Nebraska, Missouri, and Kentucky.
Foreclosure Rates in Your Area
Another major factor affecting mortgage rates in your area is the foreclosure rate. The more foreclosures there are, the harder it is for banks to do business. In order for them to keep their heads above water, they must charge higher interest rates. Foreclosure is expensive for banks. Not only do they not get back what they lent out, but they also have to pay the sell the house, which doesn’t come cheap. This causes banks in your local area to increase their interest rates to account for the riskiness of the loans as well as to help them stay in business.
Amount of Competition
Another factor, which has nothing to do with the economy is the amount of competition in the area. The more lenders and loan officers there are vying for your business, the lower interest rates will be. If a lender knows they are the only lender available in the area, they will not feel pressured to offer lower interest rates. On the other hand, if there are 3 or 4 lenders all trying to get the same business, they will try to outdo one another just to get the business.
Types of Loans Offered
Different lenders have different loans available. Among the most common are FHA, VA, USDA, and conventional. Some banks also offer their own programs, though. These alternative loans often have more flexible guidelines and pertain to borrowers with less than perfect credit. In exchange for the liberal terms, the banks often charge slightly higher interest rates, but they vary not only from state to state, but from bank to bank within the same area.
Finding the Best Rates
Even if you live in one of the “high cost” states, you can still find great mortgage rates. The key is in shopping around. It also helps to understand mortgage terms so you know what the lenders offer. Some lenders charge discount points in order to lower your interest rate. These are percentages of your loan amount. For example, on a $200,000 loan, 1 discount point equals $2,000. Others do not charge points and still offer lower rates. You have to be willing to negotiate with the lender. The best way to do this is to have several quotes from different lenders. Competition helps lenders lower their rates, as we talked about above.
Before you start shopping for the right rate in your area, find out the average interest rate in your state. From there, you can figure out how to negotiate with the lender if you want a lower rate. At least knowing the average, not of the nation, but of your state, can give you a good starting point. Keep in mind, you should work on your personal qualifying factors before you try to apply for a loan. The higher your credit score and the lower your debt ratio, the lower the quotes you will receive from lenders. Try to make yourself look as stable as possible in order to make the lender feel like you are a good risk, not one with high chances of default.