How Much You Pay for a Mortgage Depends on Where You Live
by Francesca Ortegren, Clever, October 30, 2019
Americans are in debt, and a large chunk of that debt is allocated toward mortgages. After increasing for 21 quarters in a row, mortgage debt in the United States has reached an astonishing $15 trillion, according to the Federal Reserve.
With interest rates peaking near 5% in 2018, the U.S. saw the highest interest rates since 2011 last year. Those interest rates are set by the Federal Reserve and dictate how much debt borrowers accumulate over time. However, lenders can (and do) deviate from the interest rates the Fed sets. Individual lenders also tack on fees and other expenses that add to the overall cost of the mortgage.
- $6967.89 – Mortgage Fees (highest in USA)
- 4.25% – Interest Rate (lowest in USA)
This raises two interesting questions:
Where do borrowers pay the most for their mortgage?
With the amount of mortgage debt in the U.S., and looser standards for applicants, are borrowers taking on more debt than they can manage?
To find out, we used data from the Housing Mortgage Disclosure Act (HMDA) database and Consumer Financial Protection Bureau (CFPB) to evaluate relationships between mortgage characteristics (fees, interest rates), borrower characteristics (debt-to-income ratio), and complaints filed in each state.
Here's what you need to know.
Location matters: In 2018 U.S. borrowers paid interest rates ranging from 4.24% to 7.71% depending on the state. Lenders in Maine, West Virginia and Ohio averaged rates over 7%.
Mortgage fees vary wildly from state to state: ranging from $515 to $6,970 depending on where borrowers live. Hawaiians and D.C. residents spent over $5,000 on fees in 2018.
Risky mortgages are more likely to be issued in state where the cost of living is high. Borrowers with high debt-to-income ratios were more likely to get mortgages in states with higher costs of living, like California and Hawaii.
Borrowers in states with higher mortgage payments had the most complaints, and nearly 1 out of 3 complaints was related to borrowers struggling to pay their mortgages, lending further support that home buyers are over-borrowing.
Your Rate and Fees Are Influenced by Where You Live
Mortgage rates are typically closely aligned with the Fed Fund rate set by the Federal Reserve each week. Historically the two have been highly correlated but the Fed doesn't actually control interest rates, lenders do.
Rates fluctuate on a state-by-state basis depending on local factors, even within the same lender. The average interest rate was 5.04% in 2018, but between states interest rates ranged from 4.24% in Hawaii to 7.71% in Maine. Close behind were West Virginia (7.39%) and Ohio (7.07%).
You read that correctly: some borrowers were subjected to rates 1.5x the national average, similar to those the U.S. experienced in the 1990s when rates were coming down from an all-time high in the ‘80s.
So what drives these wide variations in mortgage rates? It could be due to the local economy, foreclosure rates, and the presence of competition.
Foreclosures cost aren't great for lenders. They cost a lot of money, time, and look bad, so lending institutions tend to bump up interest rates in areas where foreclosures are more common. According to ATTOM Data Solutions' 2018 Year-End U.S. Foreclosure Market Report, Ohio homes were foreclosed at a rate of 0.63% — 1.3x that of the national average. Hawaii, on the other hand, had a foreclosure rate of 0.28% and much lower interest rates.
A high density of lenders can drive down interest rates to undercut the competition. But in places like West Virginia, where only 40 out of every 100,000 residents is a loan officer, competition doesn't have as much influence, leading to inflated rates.
Interest rates dramatically impact the cost of owning a home. A new homeowner in Maine who purchased a $183,900 home in 2018 would end up paying nearly $290,000 just in interest during the life of a 30-year mortgage. The same loan in Hawaii would accrue $150,000 less interest.
The average Maine homebuyer, who earns $110,000 annually, could be spending 14% of their income on their mortgage payments each month. A lower mortgage rate, say closer to the national average of 5%, would drop that mortgage-to-income ratio to less than 10%.
The fees associated with a loan are those charged by the lender and typically cover costs related to underwriting, application processing, and document preparation. Much like interest rates, fees also vary widely by state. While the average borrower paid a little less than $2,000 (or 1% of the loan amount), Hawaiians paid 3.5x more on fees. South Carolinians and Pennsylvanians, on the other hand, paid less than $600 on average.