Across these wide and varied United States of America, it turns out that not all mortgage rates are created equal. Interest rates on mortgages can differ from state to state for a number of different reasons—some micro and some macro. So whether you are planning to move, purchase a vacation home in another part of the country or even just buying around the corner, it’s helpful to understand which states tend to have the highest and lowest rates.
MBS set the tone
At the most macro of levels, mortgage rates are driven by the price of mortgage-backed securities, otherwise known as MBS. They’re a financial instrument composed of bundles of mortgages, that are bought and sold on the bond market. At the national level, the prices of MBSs have the largest effect on the mortgage rates offered by different lenders. And while mortgage rates are affected in partby moves in the Federal Funds rate (the rate overseen by the Federal Reserve), they’re mostly driven by demand and price changes in MBS.
Foreclosure and state laws can be key
When it comes to understanding state by state variations in rates, a big consideration for the mortgage lenders who set those rates is related to foreclosures.
The laws around the foreclosure process can vary depending on state, which in turn impacts the costs to mortgage lenders. Some states require a process known as “judicial foreclosure,” in which 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, often forcing them to charge more. More than 22 states require judicial foreclosures, including Illinois, Delaware, Connecticut, Florida and Indiana.
Mortgage shoppers in states with high foreclosure rates might have to pay higher rates, since lenders have to compensate for the increased risk of losses that potential foreclosures would cost them to operate their business. For example, during the Great Recession high unemployment spiked foreclosure rates and increased costs for mortgage lenders in the hardest-hit states.
Operating costs can get passed to consumers
Another market force affecting rates is the cost of doing business in a given state. If a state requires mortgage lenders to have a brick-and-mortar offices in order to finance local properties, those costs can get passed on to consumers. If a lender has to cover higher rent and property taxes (say, for an office in Manhattan or San Francisco) those costs can also show up in higher rates.
But fear not, consumers in high-cost states: there’s a separate market force that might bail you out.
Competition: When the market works for you
In expensive and highly populated areas, competition for business can often drive mortgage lenders to reduce their prices. The opposite often also holds true: according to a study by the University of North Carolina, Wilmington, when there are fewer lenders competing for business, rates tend to be higher.
Supply and demand can help reduce mortgage interest rates by effectively creating bidding wars when there are lots of lenders serving the same area. So, while high-population cities might have a higher cost of doing business (a cost that can sometimes show up in higher rates), that force can be countered by competition among lenders.
Highest and lowest rate states
While rates are always fluctuating between states, there are some trends that can be seen. Analyzing mortgage rate data from Zillow, the personal finance website NextAdvisor determined the states with the highest and lowest rates, compared to the national average rate. Here’s what they found:
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
The good news: Rates don’t change as much as you think
Fortunately, local factors don’t affect rates as much as macro forces, meaning that variations aren’t likely to be that large. According to Erin Sykes a NY- and FL-based real estate agent and chief economist with Nest Seekers International, “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. 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.”
Those small differentiations can be good to know when calculating your potential monthly mortgage payments. But while the hunt for the lowest possible rate is a powerful motivator, it’s probably not worth it to pack up your family and relocate to another state to save that last 1%.
*This information was compiled by NextAdvisor and is up to date as of Feb. 22, 2021.
