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Do mortgage rates depend on where you live?

By Gina Pogol
Mortgage Credit Problems Columnist


Dear Gina, I read somewhere that bad credit lenders charge people more in poor neighborhoods than they do in rich neighborhoods. Is it true that where I buy my home affects my mortgage rate? - Shawn, Livonia, Mich.

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Hi Shawn,

I think what you are referring to is a study by the U.S. Department of Housing and Urban Development (HUD) that found that, in the past, home loans for people with bad credit cost more in neighborhoods populated by less-educated or minority homeowners. In fact, so did Federal Housing Administration (FHA) mortgages.

You should probably concentrate on the term "less educated." Because if you let yourself be less educated about mortgages, you are leaving money on the table. That said, home loans do cost more in some parts of the country than others, and here's why.

It may surprise you to know that mortgage rates are not identical throughout the U.S. HUD estimates that home buyers in "non-recourse" states pay about $500 more on a $100,000 mortgage than borrowers in recourse states. ("Non-recourse" states don't allow lenders to sue borrowers if a foreclosed property fetches less in a sale than the balance of the mortgage. In these states, the lender faces more potential for losses.)

Another factor in mortgage pricing is the homestead exemption -- the larger it is, the less risky the mortgage is for the lender. Homestead exemptions allow borrowers to declare personal bankruptcy and default on other personal debts without also requiring them to default on their mortgage. Homestead exemptions leave borrowers with more post-bankruptcy income and assets, which can be used to make mortgage payments. HUD says that borrowers are charged about $500 less for mortgages in states where the homestead exemption is more than $40,000.

HUD also found that lender/broker fees were inexplicably higher in some states than others. The agency reported that borrowers in Alaska paid the least amount, followed by Wyoming, North Dakota, Tennessee and Minnesota, while those in Nevada, Utah, Michigan, Florida and Ohio paid the most -- an average of over $2,000 more.

Finally, title charges are major costs when getting a mortgage, and they vary widely by location: On a $100,000 loan they can range from $668 to $2,090. Title charges are lowest in North Dakota, Georgia, Wyoming, Colorado and North Carolina, and highest in New York, Texas, California, New Jersey and Connecticut. Shopping for the title company that charges the least can save you a bundle on a refinance or purchase.

Getting educated about mortgages

Getting educated about mortgages means shopping for your rate and comparing home loans before you choose a lender. Today, new laws make it illegal for loan officers and mortgage brokers to make more money on one borrower than another by giving one person a better deal. So once you find the lender with the cheapest mortgage, you shouldn't have to worry about getting a worse deal than the next guy.

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