Mortgage rates can vary significantly by state. Here's why - and which states have the lowest rates.

MW Mortgage rates can vary significantly by state. Here's why - and which states have the lowest rates.

By Aarthi Swaminathan

'Not all markets are created equal,' one expert notes

As with everything in real estate, where you live also has an impact on what kind of mortgage rate you can get.

It's a challenging housing market for home buyers, with home prices at an all-time high and mortgage rates above 7%. Eagle-eyed house hunters may notice a difference when they search mortgage-rate quotes online, depending on the state that they are looking in.

There's a good reason for that: Mortgage rates vary by state, and can differ as much as 38 basis points, according to data provided to MarketWatch by data and consulting company Curinos.

"Not all markets are created equal," Rich Martin, director of real-estate lending at Curinos, told MarketWatch in an interview. "Real estate is local."

The company, which works with multiple lenders, surveyed 100 lenders across the country for their rates on 30-year mortgages, as well as 40 lenders on their rates for second-lien mortgages, typically a home-equity line of credit. The analysis looked at rates for all borrowers, regardless of their credit scores.

Rates varied considerably by location. In Hawaii, a home buyer would be quoted a rate as low as 6.49%, while in Vermont, they'd be quoted a rate up to 6.88% - the highest among all states.

Assuming a 20% down payment on a $400,000 home, the higher rate would translate to a $2,103 monthly payment, while the lower rate would mean a $2,020 monthly payment. That's nearly $30,000 in additional interest paid over the lifetime of the loan.

The variation between states depends on several factors, experts told MarketWatch.

Rates vary due to the credit quality of the borrowers in that state, Martin said. Typically, the higher the credit score of the borrower, the better the loan terms - including the mortgage rate. So if borrowers in a given state typically have lower credit scores, that affects the overall rate.

The variance in rates between states could also be due to how savvy consumers are in that state, Martin added. The more that borrowers shop around for a quote, the better their rate tends to be. If borrowers ask multiple lenders for quotes on their mortgage rate, they could save an average of $76,410 over the lifetime of their loans, according to a recent report by LendingTree (TREE). In Hawaii - where mortgage rates were the lowest in the nation on average, according to Curinos data - shopping around for additional quotes could save a borrower $115,947 over the lifetime of their loan, LendingTree found.

The divergence in rates could also depend on how many lenders a market has, and how competitive they are. For instance, if there are more types of financial institutions - from credit unions to banks both big and small - and they're competing for the same pool of home buyers, that could lead to lower rates, Martin noted.

Regulatory and legal differences between states may also lead to lower mortgage rates in some parts of the U.S. "There are differences in state law regarding the foreclosure process, for example," Doug Duncan, chief economist at Fannie Mae (FNMA), told MarketWatch.

In states that have a judicial process for foreclosures, for instance, the lender has to file a lawsuit in court in order to foreclose on a house after the borrower stops paying the mortgage for a certain period.

"The timeline is much longer, so the risk to the lender is greater," Duncan explained. "So they charge a higher risk premium up front, which could lead to a higher mortgage rate."

On the other hand, in states with a nonjudicial foreclosure process, the lender has a shorter and more predictable timeline, which correlates to a lower mortgage rate. In administrative states, that process is more programmed, more predictable and faster, which would also correlate to a lower mortgage rate.

To be sure, Hawaii, the state with the lowest mortgage rates, has a combination of both types of foreclosure. North Dakota, with the second-lowest rates, follows a judicial foreclosure process, while Nevada, which has the third-lowest rates, follows a nonjudicial process.

-Aarthi Swaminathan

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June 06, 2024 06:00 ET (10:00 GMT)

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