While it might seem like mortgage refinances are the same everywhere, where you live can have a great impact on the rates you pay and on the loan you get. Different lenders serve different areas, loans in different areas are subject to different size limits, and closing procedures change from state to state. Borrowers also have a major impact on what the rate will be in a refinance.
What determines how a rate is calculated, and what should a borrower understand in order to secure the lowest rate for their future refinance?
How are rates determined?
Regardless of location, lenders don’t just pick a random number out of the air when it comes to charging rates on loans, there is regulation to some degree which dictates the approximate rate a lender can offer.
Let’s understand how mortgage lenders come up with interest rates to begin with.
There are many different economical factors that go into determining interest rates. One perhaps more well known portion of the interest rate standards comes from the Federal Reserve who sets the Fed Funds rate. This rate affects short-term and variable interest rates. Because mortgages hold longer-term loans like 10, 15 and 30-year fixed rate, they don’t always follow the Fed funds rate. Instead, they follow the yields on the 10- or 30-year Treasury notes. Treasury notes are a more influential, indicator of whether mortgage rates will increase or decrease.
Treasury notes are auctioned by the U.S. Treasury Department to the highest bidder. The yields respond to market demand. If there is a great demand for these notes, then the yields can be low. If there is not much demand, then the yields need to be high to attract investors.
Different conforming limits in different areas
Due to their stated goal of helping lower class and middle class homeowners, many government loan programs have maximum loan limits. Because houses cost more in some parts of the country than in others, those loan limits can vary by state.
As of 2017, the Fannie Mae conforming loan limit is $424,100 in contiguous states, District of Columbia, and Puerto Rico, for a one unit home. Loans above the Fannie Mae limit are not eligible for their guarantee and have to be made as “jumbo” loans. While a $424,100 mortgage would be enough for a large home in many communities, in others it would barely purchase a small condominium.
For this reason, Fannie Mae increases their loan limit to as much as $636,150 in “high-cost” areas. The high cost areas include the states of Hawaii and Alaska, the territories of Guam and the US Virgin Islands.
If your home exceeds the conforming loan limits, you’ll need to find a lender that issues jumbo mortgage loans. You will need to have lower debt-to-income ratio, a higher credit score, and a larger down payment to secure a jumbo mortgage, and again the precise qualifying terms will vary by state and by lender.
The Federal Housing Administration, which underwrites the FHA mortgages and FHA streamline refinances that give borrowers access to great rates and low down payments, also has a loan limit. The FHA Forward program’s general limit of $271,050 applies to homes in low-cost areas like rural counties in Alabama. The highest limit of $1,094,625 applies in high-cost areas of the states of Alaska and Hawaii and Guam and the Virgin Islands. Chicago’s county has a $410,000 limit while San Francisco and Los Angeles counties have the highest loan limit for the contiguous US — $729,750.
There are many variables that determine what your refinance rate will be. Rates change by area, lender, and borrower. How can you find the best refinance rate in your area? (Photo/Pixabay)
Different lenders with different risk assessments
As you probably know, there are hundreds of different banks, lenders, and credit unions each competing to offer the most unique and cost-effective mortgage and refinance products to you. Each have a different amount of holdings within their organization, too.
National and regional banks might price their products differently than a not-for-profit credit union scraping to stay in competition with the “big guys”. Each lender tends to use risk-based pricing to decide what their unique institution can handle.
Risk-based pricing is a methodology that allows lenders to create appropriate interest rates and other fees to make up for potential risk. The interest rate on a loan is determined not only by the time value of money, but also by the lender’s estimate of the probability that the borrower will default on the loan. Some larger banks have turned to predictive analytics and big data to get a more accurate assessment of risk-based pricing.
Further, different lenders serve different areas. While national lenders serve the entire country, many regional firms and community banks have very limited lending areas. This is especially salient if you need a jumbo loan. Frequently, the best rates and terms on jumbo loans come from small banks located in the same community as the collateral property.
In addition to “formal” limits on service areas, lenders also periodically change their policies regarding the economics of a given area. For instance, in the wake of the high foreclosure rates after the popping of the mortgage bubble in 2007, many lenders simply chose not to lend in certain areas. These areas vary over time but if you live in an area with many foreclosures like Nevada, parts of California, or Michigan, prepare to shop around to find a lender that is willing to lend in your area at competitive rates.
Different policies, procedures and regulations per state
Refinances work differently in different states. For example, refinance lenders in most states require you to pay for, or finance in, a title insurance policy. This policy protects the lender against the risk of someone stepping forward and claiming that they have a greater interest in the property than the lender. In Iowa, title insurance is illegal. Other states requires certain attorney fees when closing a loan that other states don’t require. Different closing costs can adjust the overall cost of a refinance.
Another important difference is the type of loan. Many refinance mortgages are actually not mortgages. They’re technically loans secured by deeds of trust. Trust deed loans are the norm in many states, ranging from Alabama to Wyoming. While they are similar to mortgages, they make it easier and faster for a lender to foreclose if you do not make your payments.
Different qualifications from a borrower
Rates differ by area, by lender, and by borrower. Usually, a bank or lender has a base interest rate that can either increase or decrease based on a borrower’s creditworthiness. Most often, banks look at a handful of particulars before starting the loan pricing adjustment. These items might include:
- Total loan amount
- Documentation (full, limited, or stated)
- Credit score
- Loan purpose (purchase or refinance)
- Debt-to-income ratio
- Property type (primary residence or investment property)
- Loan-to-value / combined loan-to-value
The more favorable you look to a lender the less your interest rate will be. If you have poor marks like a less than ideal credit score, high loan amount, or low loan-to-value, it will reflect in a higher interest rate.
Researching refinance rates in your area
When comparing each of your options, always consider using a mortgage calculator. You can easily determine how your current mortgage compares to the refinance rates on the market. You can also compare lenders side by side to see how different rates of interest can impact you in the long run.
Have you ever noticed that mortgage rates tend to move in eighths? While this might not seem like a huge change, .125% (eighth percent) or .25% (quarter percent) it could actually mean thousands of dollars in savings or costs annually. So, weighing each lender in your area, and comparing these minor differences can add up to a major impact over the course of your loan.
Lastly, every lender and area will hold a borrower accountable for different closing costs. This is another figure to take into consideration when determining the best refinance product for you. A lower interest doesn’t always mean the lowest refinance product.
Our tools help you get a better sense of your local lending environment and prepare you to get the best refinance rates possible.Here is a glimpse into each state, their current refinance rates, and different lenders within each state you can work with.
- New Hampshire
- New Jersey
- New York
- North Carolina
- South Carolina