If you're looking to buy a home in the near future, you picked a good time for it, with interest rates still near historic lows. They're not uniformly low across the country, though. Some states have relatively high average rates. Even if you live in those states, though, there's little reason to worry.
For context, mortgage rates for 30-year loans hit a nearly three-year high of 4.32% in December, and were recently around 4.27%. The Fed has begun raising interest rates and some experts are suggesting that mortgage rates could exceed 6% by 2020.
Image source: Getty Images.
States with steep(ish) interest rates (and states with low ones)
So which states offer the worst interest rates these days? Well, here are the 10 states with the highest average rates for a 30-year fixed-rate mortgage, per data from Bankrate.com (as of the second week in February):
|
Average Interest Rate for a 30-Year Fixed-Rate Mortgage |
State(s) |
|---|---|
|
4.13% |
South Dakota |
|
4.12% |
Minnesota, Montana |
|
4.11% |
Delaware |
|
4.10% |
Vermont |
|
4.09% |
Alaska, North Dakota |
|
4.08% |
Iowa, Rhode Island, South Carolina |
Source: Bankrate.com.
If you're curious, below are the states offering the best interest rates:
|
Average Interest Rate for a 30-Year Fixed-Rate Mortgage |
State(s) |
|---|---|
|
3.94% |
Nebraska |
|
3.96% |
California |
|
3.97% |
Washington |
|
3.98% |
Alabama, Colorado, Kansas, Louisiana, New Jersey, New Mexico, New York, Oklahoma, Tennessee |
Source: Bankrate.com.
Rising interest rates can be costly to home buyers
How much of a difference does a steep rate really make? Well, check out the table below, reflecting monthly payments for various interest rates for a $200,000 30-year fixed-rate mortgage. I'm including the lowest recent rate -- 3.94%, from Nebraska -- and the highest, South Dakota's 4.13%. As rates seem to be heading up, I'm including some even higher rates, too.
|
Interest Rate |
Monthly Payment |
Annual Cost |
Cost Over 30 Years |
|---|---|---|---|
|
3.94% |
$948 |
$11,376 |
$341,280 |
|
4.13% |
$970 |
$11,640 |
$349,200 |
|
4.40% |
$1,002 |
$12,024 |
$360,720 |
|
4.75% |
$1,043 |
$12,516 |
$375,480 |
|
5.25% |
$1,104 |
$13,248 |
$397,440 |
|
6.00% |
$1,199 |
$14,388 |
$431,640 |
Source: Bankrate.com, plus calculations by author.
You can see that a 4.13% interest rate won't cost you an arm and a leg more than a 3.94% rate, but it does amount to a few thousand dollars' difference over 30 years. It's much more instructive to note what happens when rates are higher, such as 5% or 6% -- remembering that historically speaking, a 6% mortgage interest rate isn't that onerous. If the current rates of around 4% rise to 6%, it can cost a typical borrower close to $100,000 or more over the life of their loan. That's a big deal.
Higher rates mean less house
Higher interest rates also mean higher monthly payments, which could limit you to a less costly (and perhaps less nice) home. If you can only swing monthly payments of $1,000, for instance, the table below shows you how much you can borrow at various rates:
|
Interest Rate |
Home Price |
Mortgage for 80% of Home Price |
|---|---|---|
|
4.40% |
$250,000 |
$200,000 |
|
4.75% |
$240,000 |
$192,000 |
|
5.50% |
$220,000 |
$176,000 |
|
6.00% |
$210,000 |
$168,000 |
|
7.00% |
$188,000 |
$150,000 |
|
8.00% |
$170,000 |
$136,000 |
Source: Bankrate.com calculator.
You're unlikely to be quoted an 8% mortgage interest rate these days, but there have been years when rates were in the double digits -- so 8% is not unthinkable. Look at how much it restricts your buying power: The difference between a $4.4% interest rate and an 8% one cuts the amount of home you can buy by about 32% -- just about a third.
Image source: Getty Images.
Good news for home buyers
Fortunately, right now, and probably for the next year or two, interest rates will remain on the low side, historically speaking, allowing you to buy more home than you otherwise could. Even if you're in a state with relatively high interest rates, you don't necessarily have to settle for the average local rate. Even in South Dakota, for example, a little online shopping yielded rates as low as 3.924% from some lenders.
You can aim to snag lower interest rates by making sure your credit score is as high as it can be, since high scores get lower interest rates from lenders. You can get free copies of your credit reports once a year from each of the main credit reporting agencies -- do so and correct any errors on them. If your score is legitimately low, consider waiting a while before homebuying, so that you can boost your score. Some ways to improve your credit score include paying bills on time and paying off a lot of debt in order to lower your debt-to-available-credit ratio. Lenders like to see you owing only about 10% to 30% of the sum of all your credit limits, because it suggests that you have your debt under control and can afford to take on some more debt via the mortgage you're seeking.
Two other helpful tips:
- Figure out just how much home you can afford. It can be tempting to go big, but doing so can leave you with little margin of safety, in case you or a spouse loses a job or your household faces some major unexpected expenses. Aim to be spending, say, no more than 25% of your income on your mortgage -- and if you can keep it to 20% or less, you'll free up more funds for retirement savings, college savings, or other needs.
- Once you decide that you're ready to make an offer as soon as you see a home you want, get pre-approved for a mortgage. That can make you a more competitive buyer.
No matter whether you live in a state with relatively high or relatively low mortgage interest rates, know that you can, to some degree, control the rates you're offered. Make some smart moves now and you may be able to spend tens or hundreds of thousands of dollars less -- and perhaps buy the home of your dreams, too.
