USA TODAY International Edition
Midwest is best in mortgage search
Geography, access to banks are key factors
When the coronavirus pandemic began battering the global economy in March, Brittney Stroh, 32, began shopping around to refinance her mortgage for a second time in Colorado Springs.
Stroh, a school administrator at Atlas Preparatory School, reached out to Security Service Federal Credit Union, her lender at the time, which offered her a 2.5% rate, down from 3.85%. But they wanted $ 4,000 in closing costs. Then she sought options with Wells Fargo to see whether she could save more money by refinancing with them, but rates hovered just above 3%.
She eventually settled on a 2.63% rate with Ent Credit Union on a 15- year mortgage, which knocked $ 95 off her monthly payment.
“We were really excited to snag a lower rate,” Stroh says, adding that her husband is an athletics director. “We’re really fortunate because we work in education, so our jobs are fairly secure. But budget cuts are coming from the state, so no job is absolutely secure. For us, it’s always been about keeping our expenses as low as possible.”
Stroh isn’t alone. When it comes to scoring the best mortgage rate, geography matters.
Metropolitan areas with a higher concentration of banks tend to have lower mortgage rates for borrowers than those metros with fewer banks, according to a new report from Haus, a homefinancing startup that provides homeowners with additional liquidity.
There is a more than 0.75% spread across lenders and a 0.35% spread across metropolitan areas for identical borrowers, the study showed. Haus analyzed more than 8.5 million mortgage originations from Freddie Mac between 2012 and 2018.
Markets with higher rates tend to have fewer banks, while markets with lower rates tend to be in markets with more banks. And the level of bank concentration in a market could prove to be vital for savings if borrowers choose to use locally based institutions.
For Americans looking for a lower mortgage rate, borrowers have better success shopping around than trying to improve their credit profile, according to Ralph McLaughlin, chief economist at Haus.
That’s because the variation in mortgage rates is driven much more immediately by lender and property location than by reasonable borrower improvements in credit score, debt- to- income and down payment amounts, McLaughlin says.
“For those looking to take advantage of low rates, the best thing they can do is shop around,” he says. “You can’t do a lot in the short run to raise your credit score to get a lower mortgage rate. But what you can easily do is shop around online, and that often times can lead to much cheaper rates.”
The cheapest vs. most expensive cities and lenders
Some of the variation among rates is due to the level of bank concentration in a given market, which suggests that some borrowers in markets with low concentrations of banks may benefit from rate shopping.
There is more than a 0.45% spread across metropolitan areas, data from Haus showed. Homebuyers or refinancers in Dubuque, Iowa; Springfield, Illinois; and Lima, Ohio, had the cheapest rates, with discounts of 0.23%, 0.18% and 0.16%, respectively. The most expensive rates were in Sandusky, Ohio; McAllen, Texas; and Danville, Virginia.
The biggest discounts typically were among smaller banks and credit unions.
The two least expensive lenders – New York Community Bank and Chicago Mortgage Solutions – are, on average, about 0.75% less expensive than the two most expensive lenders – Citizens National Bank and Texas Capital Bank. Rounding out the five least expensive lenders were USAA, PHH and Provident. Rounding out the five most expensive were Plaza Home Mortgage, Pacific Union Financial and GMAC Mortgage.
What borrowers should do
The best way for homebuyers and existing homeowners to lower their mortgage rate is to seek options among multiple lenders, experts advise.
Rate shopping won’t ding a credit score, McLaughlin says. After a hard inquiry, borrowers typically have two weeks to have additional hard inquiries without any further degradation to their credit, he added.
The biggest return to improving a credit score is by moving from “Bad,” or below 650, to “Good,” between 700 to 749. That, on average, should yield a mortgage rate that is 0.34% lower, according to Haus. Still, moving from “Good” to “Very Good” ( 750- 799) or “Excellent” ( above 800) would yield a reduction of only about 0.08% and 0.09%, respectively.
“People think this is a long process,” Stroh says, “But after going through two refinances, the time invested is so little compared with the savings.”