Florida Mortgage Rates Compared to Other States
Published: Monday, October 22 2012
Florida Mortgage Rates Compared to Other States
Welcome to Saving Thousands with Robert Palmer. Let's take a look at how Florida mortgage rates compare to mortgage rates in the rest of the country, and why interest rates are different from state to state. The two biggest factors that control the calculation of mortgage rates are prepayment speeds and loan size. You see, mortgage companies earn money from collecting interest on your loan, so the longer you keep your loan the more interest the mortgage company can earn.
There are factors that vary from state to state that affect how long borrowers keep a mortgage loan on average. The number one reason loans pay off early is refinancing to get a lower rate. Florida mortgages are actually more expensive to refinance than in many other states which helps make Florida mortgage rates lower. You see, in Florida we pay state taxes and higher title insurance rates, so it takes a bigger drop in interest rates for Florida mortgages to begin refinancing.
This means that statistically Florida mortgages will last longer than mortgages in other states. This is called prepayment speed. And because Florida has a slower prepayment speed, the mortgage company can make the same amount of money with a slightly lower interest rate. Here's an example of the extra mortgage closing costs on all Florida mortgage loans. The Florida Intangible Tax which is calculated at 0.002 times the loan amount, Florida mortgage stamps calculated at 0.0035 times the loan amount, and Florida title insurance, which is usually 0.002 times the loan amount, more expensive than most other states.
In a hypothetical situation, a borrower who has a Florida mortgage at 5.5% for $200,000 and another mortgage in a lower closing cost state at the same terms, 5.5% and $200,000 balance. So let's look at this. On this loan, the closing costs for the Florida mortgage will be $1,400 more expensive than the same mortgage in a lower closing costs state. So if interest rates drop to 5%, the borrower can save $1,000 per year in interest by refinancing. But remember, the Florida loan has an upfront cost that is $1,400 higher. This additional cost would prevent the borrower from refinancing and seeing immediate savings on interest on the Florida mortgage. However, refinancing the same mortgage in the other state, the low closing cost state, would be beneficial. In this situation, rates would need to drop an additional 0.25%, say from 5% to 4.75% for the Florida mortgage to see the same savings over a three year period than the mortgage from the other state.
This shows that other states will begin to refinance at higher rates than Florida mortgages. There's also a chance that our hypothetical rates would never drop to the 4.75% needed so the Florida mortgage would continue to earn money and pay interest for the mortgage company. Now that we understand why mortgages in Florida tend to pay off slower than mortgages in other states, let's look at why that's important to how interest rates are set. Most mortgage lenders do not earn the full interest rate on your loan. They obtain funding from Fannie Mae, Freddie Mac, or Ginnie Mae and have to pass through most of the interest to these institutions. This pass through is called cost of funds, and it's the difference between the cost of funds and the actual interest rate, or the spread, that the lenders earn.
Let's examine an interest rate spread earned by a lender on two different loans. One scenario pays off in three years and one pays off in six years. The interest rate on the loans is 4.375% and the cost of funds to the lender is 4.125% meaning the lender is earning a spread of 0.25% per year. So on loan A, the lender earns the 0.25% interest for three years for a total 0.75% in mortgage interest.
On loan B, the lender earns the 0.25% interest for six years for a total of 1.5% mortgage interest earnings. You can see that the length of time you keep the mortgage and keep making those interest payments has a huge impact on the money earned by the lender. So because Florida mortgages payoff slower, lenders can offer slightly lower rates and still are in the same income from the interest spread generated by the extra months or even years of payments.
This means that if you're comparing two same size mortgages, one in Florida and one in another low closing cost state, the Florida mortgage will have the lower mortgage rate. However, on the flip side, average Florida mortgage rates are actually higher because Florida mortgages have smaller balances. This is the second largest factor in mortgage pricing, the mortgage loan amount.
The median home price in Florida is significantly lower than many other states causing the interest rates to be higher. Let's remember, mortgage lenders make money based on the interest pay on the loan. The costs and overhead associated with originating and servicing a $100,000 loan is the same as originating a $300,000 loan but the $300,000 loan would generate three times as much interest in earnings for the lender. Rates on the lower loan are not three times as high, however, because remember, there's a baseline cost of funds. So on a $300,000 loan, the spread may be 0.125% and on the $100,000 loan, the spread or markup we need to be 0.375%. So if we use our hypothetical cost of funds at 4.125%, the $300,000 loan would receive a rate of 4.25% and the $100,000 loan would receive a rate of 4.50%. So you can see, smaller loans become more and more expensive.
Let's think about a $50,000 loan. This generates 1/6 the amount of interest as that $300,000 loan we talked about. So again, using our hypothetical mark up, we would need to add 0.75% making the interest rate as high as 4.875% compared to the much lower rate offered to the $300,000 mortgage. Mortgage rate pricing assumptions are based on very complex formulas and statistical analysis. While it's much more in depth than my examples above, the basic principles are the same.
For this reason, many mortgage lenders and mortgage brokers rely on other lenders to set their pricing for them in the form of a daily rate sheet. More sophisticated direct lenders trade their own mortgage bonds directly on the mortgage market and then have to set their own rates based on this statistical modeling. For mortgage companies who have this level of sophistication to take on and perform these tasks, they have a competitive advantage and are able to offer lower interest rates.
To learn more about how Florida mortgage rates are set, visit SavingThousands.com and enter keywords Florida mortgage rates. And remember, you can always join the conversation on the Saving Thousands forum at SavingsThousands.com where you can ask questions and get answers anytime day or night.
We are listening to you. Coming up, Robert answers your question straight from our web forum at SavingThousands.com. But next, if no down payment and 100% financing sounds good to you, stay tuned.
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