Are Mortgage Borrowers Taking on More Than They Can Handle

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Mortgage Borrowers Taking on More Than They Can Handle

Buyers Are Overextending Themselves Financially

Americans are carrying a lot of mortgage debt; according to the Fed, total U.S. mortgage debt has reached $15 trillion, which is about equal to China’s annual GDP. That number has been climbing for some time and shows no sign of slowing down.

That fact, in itself, doesn't cause worry. Mortgage debt, along with home equity debt, has the lowest delinquency rate of any household debt; at the end of 2017, only 1.2% of home mortgages were seriously delinquent. Real estate is still the best investment you can make, and it takes a lot for someone to walk away from the roof over their heads.

What is surprising, however, is how much the cost of a mortgage varies across the country. A new study by Clever Real Estate looked at mortgage rates and fees in all 50 states, and some of its findings were downright alarming.

Many aspects of the national mortgage lending industry are beset with inefficiency, poor communication, and arbitrary practices, and more often than not, it’s the borrower who pays the price.

Let’s look at some of the best (and worst) states to have a mortgage, and discuss the biggest mistake homebuyers are making.

States with the Highest Mortgage Rates

The mortgage rate is the single most important consideration when you’re shopping for a home loan. The interest rate on your mortgage determines how much your monthly payment is, and how much you pay overall, for your home. It is one of the most essential questions to ask your lending institution when buying a home. Your mortgage rate is based largely on your credit score and is a carefully calibrated assessment of how much of a default risk you are. Except when it’s not.

Clever’s mortgage cost study found that, while the national average mortgage rate in 2018 was 5.04%, state rates varied wildly, often for no apparent reason. Let’s look at some of the worst offenders:

Maine

Maine had the highest mortgage rate, coming in at 7.7%. Since mortgage rates are essentially an expression of risk - a high mortgage rate means the lender will be paid back faster, while a low mortgage rate lets the borrower take their sweet time - you’d think Maine would have one of the highest foreclosure rates in the nation. But it actually has a below-average foreclosure rate.

So why is Maine’s mortgage rate so high? Clearly, other factors are responsible. One big clue can be found in the next entry on this list.

West Virginia

The Mountain State is an even more extreme case than Maine. West Virginia has the second-highest mortgage rate, at 7.39%, but a foreclosure rate that ranks in the bottom sixth of the country. But with only 40 loan officers per 100,000 citizens, competition in the state is low.

Maine, which is even more sparsely populated, faces a similar situation. With little competitive pressure to push rates down, lenders in these states keep their rights high because they can.

Obviously, that’s the prerogative of any business, and it’s how the market is, in theory at least, supposed to work. But borrowers in these states are getting the short end of the stick; they’re paying sky-high mortgage rates not because they’ve mismanaged their credit, or present a financial risk to the lender, but simply because they live in a state with a low level of competition.

Ohio

Ohioans pay the third-highest mortgage rate in the country, coming in at 7.07%. Although Ohio has a dense population, which should foster plenty of competition, it also has a relatively high foreclosure rate.

Still, Ohioans pay much more in mortgage interest than buyers in New Jersey, which has the highest foreclosure rate. Though there are probably other factors at work here, Ohioans are stuck paying more for their mortgages simply because their state market is inefficient.

What Can You Do About High Mortgage Rates?

In a real estate transaction, everything is negotiable. However, the success of your negotiation is going to depend on how much leverage you have. In the case of your mortgage rate, you’ll have a much better chance of success if you’re a well-qualified buyer.

If you’re putting down 20% or more, have a good credit score, and a healthy debt-to-income ratio (DTI), you’re the type of borrower that lenders want to give money to. Lenders will likely be willing to make some concessions to keep you as a customer. On the other hand, if you have mediocre credit, and you’re putting 5% down, you may not have much bargaining power.

One other option to lower your mortgage rate is to buy points at closing. Buying points means you’re essentially purchasing prepaid interest. One point is equal to one percent of the amount you’re borrowing, so if you’re buying a $200,000 house, one point will cost you $2,000. It’s a lot of cash to put down, though, so make sure you’re staying in the home for long enough to make the numbers work.

States with the Highest Mortgage Fees

The mortgage rate is just one aspect of how much your mortgage costs. The other major part is the mortgage fees. These fees cover services like document preparation, underwriting, and processing the application, so you’d think they’d be more or less consistent from state to state. They’re not.

On a national scale, the average borrower paid around $2,000 in mortgage fees. But just as with mortgage rates, the state averages varied quite a bit. If you’re lucky enough to be buying a home in, say, Pennsylvania or South Carolina, you get to pay some of the lowest fees in the country, coming in at under $600.

On the other hand, if you’re buying a home in one of the following states, make sure you set aside a bigger-than-average chunk of cash to put towards your fees.

Hawaii

Hawaii home buyers got stuck with mortgage fees that were 350% of the national average, coming in at just under $7,000. Even in an expensive market like Hawaii, where the median home value is $619,000, according to Zillow, paying that extra seven grand is going to hurt.

The fact that Hawaii has the lowest mortgage rate in the nation makes these high fees seem even more questionable. If fees aren’t being driven up by market inefficiency, what could it be other than opportunism?

Washington, D.C.

Buyers in the nation’s capital pay more than double the national average in mortgage fees, with an average fee total of just under $5,400. Much like Hawaii, the District is a pricey market, with a median home value of $567,900, though it features average mortgage rates.

D.C. is densely populated, and since it’s one of the hottest markets in the country, there’s no shortage of lawyers and real estate professionals. Buyers in D.C. should question why, exactly, they’re subjected to such exorbitant fees.

What Can You Do About High Mortgage Fees?

Remember when we said that everything is negotiable in a real estate transaction? That applies to mortgage fees, too. While there are many fee providers that are chosen by the lender and the listing agent, you can negotiate some components.

The real estate commission is one big expense that can often be negotiated down, especially if the home you’re buying is expensive. While the seller technically pays the commission, negotiating a lower commission can often translate to an equivalent price discount.

Another fee that can often be reduced is the loan origination fee. This usually comes to 1% of the sale price, so in large transactions, your lender might be more willing to give you a discount. Even processing and application fees, while relatively modest, can often be haggled down. Remember, the worst they can say is no.

Study Suggests Homeowners Are Over-Borrowing

One disturbing result of this loose market is that homeowners are taking on more debt than they can comfortably handle, raising the risk of foreclosure.

Data from the Consumer Financial Protection Bureau showed that borrowers are more likely to file complaints in states with high mortgage fees. In Washington D.C., home of the second-highest fee average, lenders received 250% more complaints than average. And a third of those complaints were from borrowers who were struggling just to pay their mortgage.

This suggests that the same predatory lending practices that inflate fees up to whatever the market will absorb, and hike mortgage rates just because they can, are also overloading borrowers with more debt than they can handle.

This is, of course, a bad idea for everyone involved. A foreclosed house means a borrower lost their home, but it also costs the lender, on average, $50,000. And overall home values plummet in a neighborhood experiencing a wave of foreclosures.

The upshot? Getting state mortgage rates and fees in line with each other will not only save a lot of buyers a buck, it could also prevent foreclosures and strengthen our communities.

The bottom line takeaway is to make sure you are not a buyer taking on more than you can handle financially.

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About the author: The above article on mortgage borrowers taking on more than they can handle financially was written by Reuven Shechter. Reuven is a Marketing Analyst at Clever Real Estate, focusing on creating fantastic content that educates home buyers, sellers, and investors. Reuven has seven years of professional writing experience with his current focus in commercial and residential real estate. He’s currently based in St. Louis, MO.

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