Mortgage rate Q&A: “Why are mortgage rates different?”
Why is the sky blue? Why are clouds white? Why won’t your neighbor trim their tree branches?
These are all good questions, and ones that often puzzle even the most savvy of human beings.
First things first, take a look at how mortgage rates are determined to better understand how banks and mortgage lenders come up with interest rates to begin with.
From there, you’ll need to consider why mortgage rates are different for consumer A vs. consumer B.
Mortgages are complicated business, and there certainly isn’t a one-size-fits-all approach in this industry.
First off, there are thousands of different banks, lenders, and credit unions that offer home loans, some of them entirely unique and proprietary.
These companies compete with one another to offer the lowest rate and/or the best customer service.
The well-known names might offer higher rates in exchange for their perceived trust and familiarity.
Meanwhile, the smaller guys might offer rock-bottom rates to simply stay in contention with the big players.
Along with that, every loan scenario is different (just like a snowflake), and must be priced accordingly to factor in mortgage default risk (risk-based pricing).
Simply put, the higher the risk of default, the higher the mortgage rate. But that’s just the tip of the iceberg.
There also promotional rates, such as mortgage rates that end in .99%, and innovative marketing products like UWM’s Exact Rate that lets brokers offer strange rate combinations, including 2.541% or 2.873%.
So the possibilities truly are endless these days when it comes to different mortgage rates.
Mortgage rates don’t exist in a bubble – the parts affect the whole.
Banks and lenders start with a base interest rate (par rate) and then either raise it or lower it (rarely) based on the home loan’s criteria.
There are loan pricing adjustments for all types of stuff, including:
· Loan amount (conforming or jumbo)
· Documentation (full, stated, etc.)
· Credit score
· Occupancy (primary, vacation, investment)
· Loan Purpose (purchase or refinance)
· Debt-to-Income Ratio
· Property Type (single-family home, condo, multi-unit)
· Loan-to-value / Combined loan-to-value
The more you’ve “got going on,” the higher your mortgage rate will be. And vice versa.
In short, an individual purchasing a single-family home with a conforming loan amount, 20% down payment, and a 800 FICO score will likely qualify for the lowest rates available.
Conversely, the individual requesting cash out on a four-unit investment property with a 640 FICO score will likely be subject to a much higher rate, assuming they even qualify.
And again, rates will vary from lender to lender, so it’s a multi-layered situation.
I’ve already covered a few related topics, including why mortgage rates rates are higher for condos and investment properties.
Mortgage rates also tend to be higher on jumbo loans and refinance transactions, especially those involving cash-out.
You know those mortgage rates you see on TV or on the Internet?
Those assume you’ve got an owner-occupied single family home, a perfect credit score, a huge down payment, and a conforming loan amount.
Not to mention a newborn golden retriever with an unmatched pedigree.
Most people don’t have all those things, and as a result, they’ll see different mortgage rates. And by “different,” I mean higher.
How much higher depends on all the factors listed above. So take the advertised rates you see with a huge grain of salt.
Also, take the time to shop your home loan with different lenders, and in the process, get to better understand your risk.
Find out what lenders are docking you for and take steps to fix those things if you want the lowest rates available.
One last thing. I’ve been asked if mortgage rates can vary from state to state, and the answer is actually YES. In fact, they can even vary by county in some cases.
As you can see from the image below, some states tend to have lower average mortgage rates for one reason or another.
This list is from February 2019, when the average rate for the 30-year fixed was 4.84% nationwide, per LendingTree.
While no state offered an average rate below 4.74% or above 4.96% (pretty narrow range), there was some divergence by locality.
California led the nation with an average rate of 4.74%, followed closely by the 4.75% average seen in New Jersey and the 4.76% average found in both Washington and Massachusetts.
Nothing earth-shattering, but still different nonetheless.
But it might not be for any one reason, such as a higher default rate in state X or fewer natural disasters in state Y. Or more regulations in another state.
It could be more to do with the fact that lenders want to increase their business in a certain part of the country, and thus they’ll offer some sort of pricing special or incentive to drive rates down in say California.
So you might see a rate sheet that says .50% rebate state adjustment for loans in CA and FL, for example. This will give them a competitive advantage in those regions.
How about states where mortgage rates tend to be slightly higher, such as New York, Iowa, and Arkansas, which averaged 4.96%, 4.93%, and 4.92%, respectively?
It’s possible you might see a pricing adjustment of say .25% for one of these states that may drive the interest rate up somewhat.
In other words, rates can be priced both higher or lower depending on the state where the property is located.
Of course, if this results in unfavorable pricing you can just move on to a different lender that doesn’t charge more for the state in question.
All the more reason to shop around, compare mortgage rates online, and speak with a mortgage broker or two.
Once you’ve done that, check mortgage rates with your local bank or credit union as well.
Don’t be one of the many who obtain just one mortgage quote because you may wind up paying too much.
Read more: What mortgage rate can I expect?