July 8th, 2020 5:51 AM by Jackie A. Graves
When it comes to finding the best mortgage rate, two
pieces of advice are standard — shop around and raise your credit score. This advice remains true as ever,
but a new study about factors that can affect your rate turned up some
surprising findings that can save you money when you get a new mortgage
Ralph McLaughlin, chief economist at financial technology
firm Haus, analyzed 8.5 million home loans bought by mortgage giant Freddie Mac
from 2012 through 2018 looking for mortgage rate patterns. He found unexpected
disparities in rates by geographic area and by lender. He says you should shop
multiple lenders especially if you live in a place he identified — such as
Sandusky, Ohio, or Springfield, Illinois — where they charged
higher-than-average mortgage rates over the period he studied.
McLaughlin also discovered that raising your credit score
lowers your rate more than reducing your debt-to-income ratio or boosting your
down payment. So if you have a choice between paying down credit card debt or
scraping together a larger down payment, it’s probably wiser to tackle the
debt, because that should improve your credit score.
With mortgage rates at record lows, finding the best deal
is something of a national obsession. Here are five things to know from
1. Where you live
can affect your rate.
The biggest mortgage lenders are national players that do
business virtually. Still, many mortgages are issued by local banks and credit
unions to borrowers who prefer doing business face to face, or don’t feel
comfortable uploading dozens of documents and sending them off to an online
If you plan to walk into your local bank to apply for a
mortgage, you’ll do better if you live in an area with robust competition among
financial institutions. “Brick-and-mortar bank concentration still matters,”
In general, borrowers find good mortgage rates in big
metro areas with plenty of banks. But the best deals came in some small cities.
According to McLaughlin’s analysis, residents of Dubuque, Iowa, landed the
lowest rates — loans in Dubuque averaged 23 basis points, or 0.23 percentage
points, below national rates.
The highest rates came in Sandusky, Ohio, where borrowers
paid 23 basis points above the typical rate, even after adjusting for
In one head-scratching finding, Sandusky is just 100 miles
from Lima, Ohio, but their residents pay far different mortgage rates. Lima is
the third-cheapest metro area for borrowers and Sandusky is the priciest.
There’s a gap between the two small cities of 39 basis points, or 0.39
2. Rates vary by
McLaughlin also found a gap between the rates charged by
lenders. The two least-expensive lenders during the study period — New York
Community Bank and Chicago Mortgage Solutions — were, on average, about 75
basis points less expensive than the two most-expensive lenders. To put that in
perspective, on a $300,000 loan amortized over 30 years, the difference between
a rate of 3.75 percent and 3 percent amounts to $124 a month.
That gap underscores the importance of shopping around.
It’s possible that you can find a better deal through an online lender or by
using a mortgage broker.
In any case, don’t let your friendly neighborhood banker be the only person you
ask for a quote.
3. Improving your
credit score pays dividends.
Another big payoff comes from improving your credit score,
McLaughlin says. He found a spread of 43 basis points, or 0.43 percentage
points, between borrowers with credit scores below 650 and those with scores of
800 or higher.
That’s a significant savings, but McLaughlin acknowledges
that improving your credit score isn’t easy or fast. Raising your mark that
much likely will require a year or two of discipline, and a regimen of on-time
payments and paying down existing debts.
4. Making a bigger
down payment won’t affect your rate much — but it could save you money.
Increasing your down payment from 5 percent or less to 20
percent or more can cut your mortgage rate by an average of 20 basis points,
Why so little? Because private mortgage
insurance (PMI) makes up for the additional risk borne by the
lender. “You don’t need a higher rate to cover the risk when you’re making a
lower down payment,” McLaughlin says. “That’s what mortgage insurance is for.”
But don’t overlook the importance of getting rid of
PMI. This insurance can add thousands of dollars to your borrowing
costs over the years — a lot to pay for an insurance policy that protects the
lender, not you.
5. Decreasing your
debt-to-income ratio matters even less.
The debt-to-income (DTI) ratio measures how much of your
monthly pay is eaten up by your mortgage, car loans, student loans and credit
cards. The lower the better, at least in theory. But McLaughlin found DTI had
surprisingly little impact on borrowers’ mortgage rates.
Moving from a DTI ratio of more than 43 percent to a ratio
of less than 30 percent led to a rate reduction of just 5 basis points, or 0.05
percentage point. The reason? Credit scores and the size of the down payment
already act as a proxy for DTI. “It’s highly correlated with the loan-to-value
ratio,” McLaughlin says. “If you have a high DTI, that means you’re probably
also not putting up a big down payment.”
One caveat: McLaughlin’s analysis doesn’t include loans
originated in 2019 and 2020, and some lenders’ policies and practices might
have changed in that time.
What you can do to
get a better mortgage rate
To secure the most favorable mortgage rate, take these
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