Mortgage interest rates differ from state to state, but 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. Here are some examples of how Florida mortgage rates differ when compared to other states.

Florida Prepayment Speeds

There are various factors from state to state that affect how long borrowers can keep a mortgage loan. However, refinancing to get a lower rate is the number one reason loans pay off early. Florida mortgages are actually more expensive to refinance than in many other states ? which helps lower Florida mortgage rates. Floridians pay state taxes and higher title insurance rates, so it takes a bigger drop in interest rates for Florida mortgages to begin refinancing.

Statistically, this means that 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 is calculated at 0.002 times the loan amount, Florida mortgage stamps are calculated at 0.0035 times the loan amount, and Florida title insurance 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 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 know how interest rates are set.

Florida Interest Rates

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 on most of the interest to these institutions. This 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.

It?s clear that the length of time you keep the mortgage and make those interest payments has a huge impact on the money earned by the lender. Therefore, because Florida mortgages pay off slower, lenders can offer slightly lower rates and retain 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. 

Florida Mortgage Loan Amounts

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 because there's a baseline cost of funds. Therefore, on a $300,000 loan, the spread may be 0.125%, and on the $100,000 loan the spread or markup would need to be 0.375%. 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%. As 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. 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 the 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 sophistication mortgage companies to take on and perform these tasks, they must have a competitive advantage and be able to offer lower interest rates. 

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