10 Cheapest States for Mortgage Rates | Bennie D. Waller, Ph.D.

10 Cheapest States for Mortgage Rates

What Affects Regional Mortgage Rates

Several factors work in tandem to drive mortgage rate changes. On the national level, the prime rate, LIBOR, bond yields, inflation and mortgage-backed securities all affect interest rates. Regionally, factors like borrower demand, local property values, default rates, loan concentration and unemployment can play a part in mortgage rate variation, as well.

So where is the cheapest place to take out a loan? Of the 10 best states for affordable mortgage rates, six are located in the Northeast. Conversely, six of the 10 worst states for mortgage rates are located in the Midwest and Northwest.

These trends could be somewhat attributed to the local housing markets, specifically local home prices, according to David Donhoff, a certified mortgage planner.

“In the Midwest where loan amounts are small, rates are forced to be higher simply to cover the transaction costs in the rebate and yield of the rates offered,” Donhoff said. “On the coasts the loan sizes are larger, and that also creates more competition, so the two factors together drive average rates lower.”

Local mortgage rates are also largely dictated by the principle of supply and demand. If a region’s economy is struggling and the unemployment rate is high, people will be less likely to be buying houses, forcing rates to fall to entice borrowers. Likewise, if housing demand is high thanks to local job growth and a strengthening economy, buyer demand will increase, allowing rates to do the same.

Variations in risk can also affect the rates consumers are offered.

“Mortgage rates are largely driven by risk,” said Bennie D. Waller, Ph.D, professor of finance and real estate at Longwood University. “That is, areas with a higher risk of default will command a higher mortgage rate. Much like we saw different areas of the country encounter varying degrees of housing default in the 2007-2008 housing crisis, different areas will also have varying degrees of credit risk.”