Research Reveals Which Factors Affect Your Mortgage Rate Most

A young couple reviews a mortgage document
Photo by Gutesa / Shutterstock.com

Originally published by Jeff Ostrowski on Bankrate.com.

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 or refinance.

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 McLaughlin’s research.

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 lender.

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,” McLaughlin says.

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 creditworthiness.

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 percentage points.

2. Rates vary by lender

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% and 3% 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% or less to 20% or more can cut your mortgage rate by an average of 20 basis points, McLaughlin says.

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% to a ratio of less than 30% 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 steps:

  • Compare offers. Get offers from at least three lenders. If you live in an area with limited competition among local banks, that might require you to shop online.
  • Understand regional differences. Rates charged by local lenders can vary widely by region.
  • Spruce up your credit score. It’s the best way to lower your rate, and more effective than boosting your down payment or improving your debt-to-income ratio. “Focus on your credit score first, because that’s going to give you the biggest bang for your buck,” McLaughlin says.

Learn more:

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
15 Products You Need — Even If You Didn’t Know It
15 Products You Need — Even If You Didn’t Know It

Discover some must-have products on Amazon that you didn’t even know you were missing.

7 Reasons Workers Age 65 and Older Have Not Retired Yet
7 Reasons Workers Age 65 and Older Have Not Retired Yet

For some, the golden years are a time to increase the gold — but their reasons for delaying retirement vary widely.

America’s Most Reliable Appliance Brand Is a Surprise
America’s Most Reliable Appliance Brand Is a Surprise

Have you heard of this appliance manufacturer?

12 Easy Ways To Make Make Money Online Without Leaving Home
12 Easy Ways To Make Make Money Online Without Leaving Home

If you’re hanging around the house a lot these days — and who isn’t? — use your time to make some extra cash.

8 Amazon Picks Under $30 for Coffee Lovers
8 Amazon Picks Under $30 for Coffee Lovers

We’ve brewed up a list of amazing Amazon products that are sure to perk you up.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Whether you resell it for a big profit or add it to your own wardrobe, this type of clothing is a hidden steal.

10 Things Frugal People Never Buy
10 Things Frugal People Never Buy

If you’re a true tightwad, the mere thought of spending money on these items gives you the willies.

7 Social Security Benefits You May Be Overlooking
7 Social Security Benefits You May Be Overlooking

There’s more to Social Security than retirement benefits.

This Simple Mistake Might Weaken Your COVID-19 Vaccination
This Simple Mistake Might Weaken Your COVID-19 Vaccination

Avoid doing this before you get vaccinated.

10 Cars You Are Most Likely to Keep for 15 Years
10 Cars You Are Most Likely to Keep for 15 Years

The cars that owners hold onto the longest have one thing in common, a new study shows.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

The 6 Best Investing Apps for Beginners
The 6 Best Investing Apps for Beginners

If you’re looking to ease into investing in the coronavirus economy with just a little money, check out these easy-to-use tools.

7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

Taking a Multivitamin? Here’s Why You Should Reconsider
Taking a Multivitamin? Here’s Why You Should Reconsider

A new study has bad news for the millions of Americans who spend money on multivitamins.

13 Amazon Purchases We Are Loving Right Now
13 Amazon Purchases We Are Loving Right Now

These practical products make everyday life a little easier.

11 Products Now in Short Supply Due to the Pandemic
11 Products Now in Short Supply Due to the Pandemic

Many goods we take for granted have become tough to find in 2021.

10 Deep Discounts Available on Amazon This Friday
10 Deep Discounts Available on Amazon This Friday

These items are all steeply discounted — but the deals won’t last long.

9 Things You Should Never Leave in a Car
9 Things You Should Never Leave in a Car

Thinking of leaving these possessions in a car? Prepare for unexpected consequences.

9 Mistakes People Make When Cleaning With Vinegar
9 Mistakes People Make When Cleaning With Vinegar

Cleaning with vinegar can save you a lot of money, but using it like this can cost you.

8 Things You Should Replace to Improve Your Life Today
8 Things You Should Replace to Improve Your Life Today

Being frugal isn’t smart if you put off replacing these items.

7 Income Tax Breaks That Retirees Often Overlook
7 Income Tax Breaks That Retirees Often Overlook

Did you realize all these tax credits and deductions exist — or that they apply to retirees?

10 Things Successful Retirees Do Differently
10 Things Successful Retirees Do Differently

These habits and characteristics can help put you on the track to success.

Prepare to Pay More for These 31 Drugs in 2021
Prepare to Pay More for These 31 Drugs in 2021

More than 700 prescription medications have seen price hikes so far this year. Here’s a look at the worst.

7 Costly Health Problems That Strike After Age 50
7 Costly Health Problems That Strike After Age 50

As we age, our bodies wear down. Here is how to cut costs associated with some common ailments.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.