One of the most common paths to building wealth is through homeownership. However, when there isn’t a level playing field for all people to buy a home, then there’s a problem. This article looks at mortgage interest rates by race to see if there are any differences.
Below is a chart highlighting mortgage rates by race by Pew Research. The chart is from 2015 when mortgage rates were much higher than they are in 2021. However, the data is being used to form a baseline.
The first area of the chart to look at is the ALL row to find your baseline. Then you compare the ALL percentage with the percentage next to each race by mortgage rate.
For example, 31 percent of all races paid a mortgage rate of between 3 – 3.9 percent. In comparison, only 25 percent of Blacks paid a 3 – 3.9 percent mortgage rate. Conversely, 38 percent of all Asians paid a 3 – 3.9 percent mortgage rate.
Said differently, 19.35% fewer Blacks paid a mortgage rate of 3 – 3.9 percent compared to all races. Conversely, 22.5% more Asians paid a 3 – 3.9 percent mortgage rate than all races.
Thankfully, mortgage rates between 4 – 5.9 percent don’t look too distorted across all races compared to the baseline.
Notice how the All row percentages are very similar across all mortgage rates to the Whites percentages. This is likely because Whites are the majority race in America.
Obviously, it is better to have a higher percentage of your race paying the lowest mortgage interest rate. With mortgage rates at-or-near all-time lows, hopefully, every race is taking advantage.
Why Is The Mortgage Interest Rate By Race Different?
In a perfect world, we’d all be getting to refinance or take out a new mortgage at the lowest interest rate available. But we live in an imperfect world where everybody starts off with different levels of wealth.
There was a reason why America had to pass the Fair Housing Act of 1968. The Act prohibits discrimination concerning the sale, rental, and financing of housing based on race, religion, national origin, or sex.
Here’s more detail about housing discrimination from Dima Williams at Forbes.
Housing Discrimination In America
The Great Depression led to the establishment of the Home Owners’ Loan Corporation and the still operational Federal Housing Administration (FHA). There was a “two-tier approach” to housing.
The latter promoted residential segregation, argues Michela Zonta, senior housing policy analyst with the Center for American Progress. It did so by shunning investments in city areas where people of color lived and by placing so-called restrictive covenants to keep middle-class neighborhoods white.
After the passage of the Housing Act of 1937, low-income public housing projects mushroomed in inner cities, replacing slums and consolidating “minority neighborhoods.” Major road construction and suburbanization further segregated American cities.
At the same time, black Americans as well as other citizens of color found it extremely hard to qualify for home loans, as the FHA and the Veterans Administration’s mortgage programs largely served only white applicants. Those discriminatory practices prevented people of color from accumulating wealth through homeownership.
“African American families that were prohibited from buying homes in the suburbs in the 1940s and 50s, and even into the 1960s, by the Federal Housing Administration gained none of the equity appreciation that whites gained,” says historian and academic Richard Rothstein in the film Segregated by Design, which is based on his acclaimed book, The Color of Law.
What’s Driving Different Mortgage Rates By Race Today?
Now that we understand some of the housing history of America, we can get an inkling of how decades of inequality compounded into the significant wealth differences among races we see today.
In order to avoid discrimination based on someone’s ethnic background, the Department of Housing and Urban Development (HUD) actually requires lenders to ask about borrowers’ race.
HUD can then review lender records to make sure they aren’t routinely turning down minorities or charging them higher fees. I would have thought that not allowing lenders to ask a borrower’s race would help reduce discrimination.
After all that has happened, I don’t think banks today are purposefully looking at someone’s race and deciding they are going to charge a higher or lower rate by race. Instead, banks are mainly focused on the creditworthiness of the borrower. A bank’s main mission is to get paid back and earn a profit.
The main reason why mortgage interest rates differ by race today is likely mainly due to different levels of income by race and different levels of wealth by race. The higher your income and wealth, the higher the likelihood your mortgage rate will be lower.
During the 2008-2009 financial crisis, banks suffered tremendous losses. As a result, banks have tightened their lending standards. For example, in 2020, the average credit score for an approved mortgage borrower is 760. This is an increase from ~720 in 2009.
It’s Sometimes Not Easy To Refinance
Back in April 2015, as an Asian-American, I was rejected from refinancing my mortgage. I wasn’t even offered a higher rate.
Despite having enough assets to cover all liabilities by 5X, I didn’t have the requisite two years of freelance income to qualify. I was obviously upset not to be able to lower my mortgage rate by 0.5%, but I didn’t give up.
In 2019, I was able to prevent my 5/1 ARM from resetting to 4.5% by refinancing to a 7/1 ARM at 2.625% with no fees. It was the hardest mortgage refinance I’ve ever been through. The only way to succeed was to keep on pushing.
Then in 2020, I was able to get preapproved for another 7/1 ARM at 2.125% with minimal fees. This process wasn’t as tough because I had paid down more debt and increased my income.
The key to getting a mortgage is to understand the financial metrics the bank is looking for and work on these financial metrics until you can qualify.
Let’s go into more detail on how to get a better mortgage rate.
Lower Mortgage Interest Rates For All Races
Regardless of your race, we can all do better to get the lowest mortgage possible. Here are my tips after refinancing dozens of mortgages and getting dozens of new mortgages since 2003.
1) Know your debt ratio.
The main reason why borrowers pay higher interest rates or get rejected for a mortgage loan is that their debt-to-income ratio is too high or their credit score is too low. You’re unlikely to be following the 30/30/3 rule of home buying, which means you’re probably paying a higher mortgage rate.
Thanks to the new Qualified Mortgage rule, most mortgages have a maximum back-end debt-to-income ratio of 43%. In other words, if you have a monthly gross income of $10,000, the most debt you can have across all liabilities is $4,300 before being rejecting.
A front-end debt-to-income ratio calculates only your monthly housing payment. In other words, if out of your $4,300 in liabilities, $2,000 is from housing, then your front-end DTI is 20% ($2,000/$10,000).
Banks will look at both, but emphasize the back-end the most. Hence, work to lower your debt because no matter what race you are, once you get beyond these DTI limits, you’re done.
2) Make more money.
If you are having trouble going the easy route of reducing your debt, then your only other alternative is to make a lot more money to get your debt-to-income ratio down.
I got rejected from my mortgage refinance in 2015 because I wasn’t making enough from my freelance work. As a result, I turned up the hustle meter and landed several more freelance clients so I could eventually get approved for a refinance.
Taking the attitude that the bank owes you something is the wrong approach. Nobody owes you anything!
The easiest way to make more money is to work more hours. There are actually people out there who work 40 hours a week or less and complain they can’t get ahead. Meanwhile, their peers who work 60 hours or more a week.
There’s nothing complicated about working more hours to get paid more money. The opportunities to earn extra income from the gig economy are endless. Further, to get ahead, nobody should be too proud to work a minimum wage job.
If you don’t want to work more hours for whatever reason, then you’ve got to work smarter by utilizing leverage. Taking advantage of the internet is the most obvious way to leverage your brand to make more money. Billions of people are online.
Another lever is to allow your investment returns to compound over time to the point where your money is making more money than what you can make yourself. Finally, instead of only consuming, produce something that only you can produce.
3) Raise your credit score.
In order to get the lowest mortgage interest possible with the lowest fees, you now need to have a credit score of 800+. I have spoken to multiple lenders since 2019 and they all say the same thing.
Back between 2000 – 2009, the minimum credit score required to get the lowest mortgage rate was 720. Standards have gone up since the financial crisis and during the global pandemic.
Therefore, you need to learn how to improve your credit score to 800+.
4) Create competition for your business.
You’re always going to get the best deal if you have at least one other lender competing for your business. Because I saw a man and a woman sitting in the living room for a house I wanted to buy in 2004, I decided to offer $23,000 more simply due to anxiety!
Things worked out more than a decade later, but at the time, I felt I shouldn’t have paid so much. As soon as another lender comes into the arena, your chances of getting a lower mortgage rate improve.
The easiest way to get real competing mortgage offers for your business is to check online through a mortgage marketplace like Credible. With Credible, you’ll get free, no-obligation mortgage rate quote in minutes. It is my favorite free mortgage marketplace. Once you fill out an application, qualified lenders will compete for your business.
You should also at least make a phone call or shoot an e-mail to a competing local bank. See what they can offer your. The more competing quotes the better.
5) Promise more business.
Banks want to do business with long-term customers they like. Every single banker’s mantra is to cross-sell you as many products as possible, e.g. checking account, savings account, CD account, brokerage account, mortgage, HELOC, unsecured loan, etc. The more products they can get you in, the more they will make. And the more likely you will stay with them.
Your goal is to be perceived as a thoughtful borrower with a bright future. You can do this by discussing your education, career path, aspirations, and so forth so the bank believes in your future. Also, work on developing emotional intelligence. The more they like you, the better service you will get.
6) Buy less house.
If you can’t qualify for a mortgage or face paying a much higher than market rate interest rate, you’ve got to accept the reality that you can’t comfortably afford your home. Homeownership, contrary to what you may believe, is not a right. You’ve got to work at being able to afford the classic American dream to get neutral inflation.
The reason why there was a housing crisis in 2008-2009 was that too many people had too much debt. Their incomes suddenly went away. They couldn’t afford to float their mortgage from savings long enough until their income returned.
I recommend everybody have at least a 20% downpayment plus a 10% buffer in the form of cash or liquid securities. Follow my 30/30/3 home buying rule.
Put Yourself In The Lender’s Shoes
Banks are in business to make money. Their interest rate offer corresponds to the amount of risk they see in you. The more you can look good to them on paper, the better terms you will get.
Race has nothing to do with whether your debt-to-income ratio is too high or your credit score is too low. It’s your financial health and financial future that matters the most.
Although the mortgage interest rates by race data appear unfair, we can do things to get lower rates, no matter what our race. That should be music to most people’s ears.
Recommendation: Get a free real quote through Credible. Credible is a mortgage lending marketplace where qualified lenders compete for your business. With mortgage rates at or near all-time lows, it’s good for every race to take advantage. Inflation expectations are increasing, hence, refinance before rates go higher.
Readers, do you think lenders discriminate by race? What are other ways in which all races can get a lower mortgage rate?
See post: Three White Tenants, One Asian Landlord for more discussions on race and real estate.
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