Why Do Mortgage Rates Differ Between States?

Consumers who use helpful tools like LendingTree's LoanExplorer might wonder why they have to input a zip code in order to get a list of mortgage rate quotes from competing lenders. Why would the property location matter? It does for several reasons, including the amount of competition, the difficulty of foreclosure in the event of default, and the locally-influenced cost of doing business for the lender.

Mortgage Rates in Hawaii

Hawaii is a perfect example. Search on LendingTree for mortgage rates for a 5/1 hybrid ARM, for example, and the rate in Hawaii is approximately .5 percent higher than it is in California. That's a HUGE difference!

Why would mortgage rates in Hawaii be so much higher?

Limited Competition

First, there are fewer mortgage professionals and lenders, and limited competition in almost any industry means higher prices. One reason for this is that Hawaii law prohibits lenders from operating in the state unless they have a physical brick-and-mortar presence. This eliminates competition from lenders with the lowest costs because most of them operate online, not in physical branches. It also makes it more difficult to start a lending business in the state, which keeps competition down and prices high. According to Thomas Licensing, the other 12 states with some form of brick-and-mortar requirement are Alabama, Arizona, Missouri, Montana, North Carolina, New Jersey, Nevada, Oklahoma, Pennsylvania, South Carolina and Texas.

Differences in Costs

Labor costs and rents in Hawaii are higher, so the brick-and-mortar requirement creates added expenses to lenders that would be less of an issue in states with lower costs. CNBC's report America's Top States for Doing Business 2013 ranked Hawaii dead last. The state ranked poorly in the categories of infrastructure, cost of living, cost of doing business, technology, business friendliness, the economy, education and the workforce quality. Poor performance in these areas make doing business difficult for companies and expensive for customers.

Other states ranking poorly for costs of doing business include New York, California, Massachusetts, Washington, Illinois, Pennsylvania, Connecticut and New Jersey.

Foreclosure Laws

Twenty-two states use judicial procedures as the primary way to foreclose. This means that when a borrower defaults on a mortgage, the lender must file a complaint asking the court to allow the it to foreclose its lien and take possession of the property. The homeowner is served notice of the complaint and is permitted to dispute the facts, and there may be a hearing or trial. This process is expensive and time-consuming, and it increases the risk of losses to mortgage lenders. States with some form of judicial foreclosure requirement include: Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania,South Carolina, South Dakota, Vermont and Wisconsin.

The remaining states primarily use non-judicial foreclosure. This means that if the borrower fails to make mortgage payments, the homeowner gets a default letter and in many states a Notice of Default is recorded. If the homeowner doesn't take care of the problem, the lender sends him or her a Notice of Sale and makes the upcoming sale public. Once the legally required notice period (determined by each state) expires, the property is auctioned off. This is faster and less costly for lenders, so they can charge lower mortgage rates.

What Consumers Can Do

For borrowers living in high-cost states, it's even more critical to shop aggressively for mortgage financing because their costs are already higher. Tools like LendingTree's LoanExplorer can help them find the most competitive offers. In addition, consumers should consider different loan types, because the rate difference isn't always as pronounced for every product. California 30-year and 15-year fixed rates (as of 9/25/14 in LoanExplorer) were about .25 percent lower than Hawaii's -- considerably less than the .50 percent difference in the 5/1 product.

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