Factors that Affect Mortgage Rates – Your State

It may surprise you to learn that mortgage rates in the US can vary quite a lot between states. LendingTree data for the second quarter of 2012, for example, shows that average mortgage rates varied from 3.84 percent for New Jersey, the state with the best mortgage rates, to 4.09 percent for Nebraska, the state with the highest. That is why, when requesting mortgage quotes, you are asked where the property to be financed is located. More…

How your state affects your mortgage rate, continued.What accounts for rate differences between states? Primarily, differences in risk:

  • The percentage of borrowers who default on their home loans
  • The percentage of homeowners who quickly refinance or sell their homes
  • Whether state laws allow lenders to sue borrowers who default

Risk of mortgage default

The economy of individual states is an important factor – when the local economy is weak, the risk of mortgage default increases, and lenders / investors require higher mortgage rates to compensate them for assuming that risk. Conversely, states with low unemployment and increasing home prices are less risky to lenders and investors and mortgage rates can be lower.

Refinancing risk

In addition to the risk of mortgage default, there is the chance that the loan will be refinanced or the property sold before the mortgage lender or servicer has made its expected profit. This is referred to as “refinancing risk” or “reinvestment risk,” and it is a function of property prices and the stability of real estate markets, mortgage rates, the availability of credit and other factors. It makes sense that when property values are rapidly increasing, homeowners have more incentive to refinance their mortgages or sell their homes. In stable or soft markets, refinancing risk is lower. Refinancing risk varies from state to state and also changes over time.

Foreclosure laws and mortgage rates

Laws governing mortgage foreclosure treat mortgages as recourse loans in some states and non-recourse loans in others. “Recourse” is the ability of the lender to recover money owed by the borrower in the event of foreclosure. Here’s an example of a foreclosure in a state that considers mortgages to be recourse loans:

  • Borrower owes $200,000 and defaults on the mortgage.
  • Late fees and collection costs add up to $20,000, for a total of $220,000.
  • The home fetches $180,000 in a foreclosure sale.
  • The lender sues the borrower for the remaining $40,000 and wins. This is called a deficiency judgment and the lender has the right to collect it.

In a non-recourse state, the proceedings go differently:

  • Borrower owes a total of $220,000 (principal balance plus fees and collection costs).
  • The home fetches $180,000 in a foreclosure sale.
  • The lender writes off the remaining $40,000.

Researchers estimate that the risk to the lender of being unable to seek a deficiency judgment adds almost a quarter percent to mortgage rates in non-recourse states. Non-recourse states include Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, and Washington.

While rates vary from state to state, there isn’t a lot that you can do about it if your state is a more expensive one. However, by comparing mortgage quotes from several competing lenders, you can negotiate a better deal, whatever state you reside in.

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