Last updated: January 16, 2018

How Does Location Affect a Mortgage Rate?

Mortgage rates vary quite a bit from state to state. A recent study revealed that there is a variance of 0.71% between the best and worst rates across the nation. Why is this important? If all other aspects of the mortgage were the same, things like term, principal, down payment, and all the rest, that difference in either end of those state interest rates would mean the buyer would pay another $25,000 over the life of the loan.

So why is there such a gap between the different interest rates available state by state? Let’s explore the reasons.

Mortgage Default Risk

Lenders have to price mortgages based on the chance of someone defaulting on their loan. Too many defaults can create serious problems for a lender’s bottom line, so to offset that risk to their business, lenders have to bake in those costs into the interest rate. Each state’s economy varies. Some states have a lower risk of mortgage default and, unfortunately, others have a higher risk.

States that have a weak economy will generally see a higher interest rate passed onto the buyer.

Early Repayment Risk

Lenders make their money on the interest paid on the mortgage loan. That money is then used to finance other mortgages, employ staff, and to maintain the business. If a borrower pays off their mortgage early or does an earlier than anticipated refinance, then all of the revenue the lender was expecting from that loan vanishes. If too many borrowers do that, it’s a problem. For states that have higher than average pay offs, lenders have to compensate with the interest rate.

State Laws

The lending environment in United States can get complicated quickly from a legal standpoint as each state is allowed to pass their own set of laws. From a lender’s perspective, foreclosure laws are very important. If a borrower has defaulted on their loan, often the only means that the lender has to recover any of their costs is through foreclosure proceedings. States that make foreclosure more arduous, generally see higher rates.

While foreclosure laws that favor the borrower might seem beneficial for the customer, those costs are be passed on to everyone.


More lenders in a state also means that there are fewer customers for each. As a result, borrowers have great flexibility in picking the best deal. To compete, lenders will often cut their margins and offer more competitive rates. This is particularly true in the modern lending environment where the Internet makes it very easy to go rate shopping.

Lender Costs

Different states have different costs of living. For instance, Hawaii is the most expensive state in the Union. No surprise there, it’s an island a few thousand miles out on the Pacific Ocean. Still, New York is expensive. California is expensive. It makes sense that some states are more also expensive for a lender to be in than others. Those additional costs are often generally reflected within the interest rate.

Loan Size

Loan size makes a big impact on interest rates, as well. Often loans that are too big, as well loans that are too small, get a slight uptick in their interest rates. Why? Larger loans, aka Jumbo loans, are often more difficult for lenders to originate and they present a bigger risk if something goes wrong with the borrower’s repayment ability. Small loans have such a small margin compared to largely fixed costs to generate the mortgage and required paperwork that the lender has to increase the rate to make it financially viable to offer them.

Pacific Union Financial

Pacific Union Financial, LLC is a full-service mortgage lender providing originations and loan servicing across the United States. A privately held direct lender with Fannie Mae, Freddie Mac, and Ginnie Mae approval, we originate loans through our Retail, Wholesale, and Correspondent channels. Let us know how we can help you expand your business.