12 states with rock-bottom mortgage rates

Before you go, we thought you'd like these...
Before you go close icon

It's looking like a pretty good time to buy a home, if you're in the market for one. Interest rates have been near historic lows for many years now, but have started inching up. The national average mortgage interest rate is interesting, but the actual rate you're quoted where you live might be a bit different.

Specifically, 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.

Save big with low interest rates

So which states offer the best interest rates these days?

Here are the 12 states with the lowest average rates for a 30-year fixed-rate mortgage, per data from Bankrate.com (as of the second week in February):

13 PHOTOS
12 states with rock-bottom mortgage rates
See Gallery
12 states with rock-bottom mortgage rates

Nebraska
Average interest rate for a 30-year fix-rated mortgage: 3.94%

Source: Bankrate.com

California
Average interest rate: 3.96%

Source: Bankrate.com

Washington
Average interest rate: 3.97%

Source: Bankrate.com

Alabama
Average interest rate: 3.98%

Source: Bankrate.com

Colorado
Average interest rate: 3.98%

Source: Bankrate.com

Kansas
Average interest rate: 3.98%

Source: Bankrate.com

Louisiana
Average interest rate: 3.98%

Source: Bankrate.com

New Jersey
Average interest rate: 3.98%

Source: Bankrate.com

New Mexico
Average interest rate: 3.98%

Source: Bankrate.com

New York
Average interest rate: 3.98%

Source: Bankrate.com

Oklahoma
Average interest rate: 3.98%

Source: Bankrate.com

Tennessee
Average interest rate: 3.98%

Source: Bankrate.com

HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE

How much of a difference does a low 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:

Interest Rate

Monthly Payment

Annual Cost

Cost Over 30 Years

3.97%

$951

$11,412

$342,360

4.17%

$975

$11,700

$351,000

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.

The slightly higher rates are ones you might get in other states -- or if your credit score isn't very high. The significantly higher rates are ones that might be offered routinely within a few years. 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 around 32% -- just about a third.

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. South Dakota, for example, recently sported the highest average interest rate, at 4.13%. But a little shopping around yielded rates as low as 3.924% from some lenders.

Aim to snag the lowest interest rates you can. A good way to do so is by making sure your credit score is as high as it can reasonably be, as 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.

The $16,122 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

Find a New Home

Buy
Rent
Value
Powered by Zillow

From Our Partners