The U.S. housing market continues to see historically low mortgage interest rates and rising home prices, locking many out of finding affordable real estate. Another challenge? The mortgage rate disparities between Black and white homeowners.
When compared with white homeowners with similar incomes, Black homeowners have first mortgages — the loan used to buy or refinance a home — with higher interest rates, according to a new analysis from Harvard University’s Joint Center for Housing Studies (JCHS). What’s more, white homeowners with a significantly lower income than Black homeowners also have lower interest rates.
Lending discrimination lingers in mortgage market
The analysis, authored by JCHS research analyst Raheem Hanifa, found that although mortgage rates drop as incomes rise, race can impact the rate attached to a borrower’s home loan. The median interest rate for a Black homeowner with a household income of at least $100,000 was 4.169%, while a white homeowner with the same income had a median rate of 3.946%, a 22-basis-point discount.
The largest disparity exists between Black and white homeowners earning a household income between $30,000 and $45,000. Black homeowners with this level of household income had a median interest rate of 4.506%, while the rate for white homeowners was 29 basis points lower, at 4.213%.
Not all refinances are created equal
A mortgage refinance can help you snag a lower mortgage rate and monthly payment, cash out some of your available equity or get rid of your mortgage sooner. But, according to JCHS’ analysis, Black homeowners are not reaping the same level of refi benefits as white homeowners.
While the analysis found that Black homeowners were able to refinance into a mortgage with a rate that was 22 basis points lower than their old rate, that was still 20 basis points higher than rates for white homeowners who refinanced. Additionally, refinance rates for Black homeowners were similar to those of white homeowners who didn’t go through the refi process.
Remember to shop around
Your mortgage interest rate affects your loan affordability and several factors are used to calculate that rate, including, but not limited to:
- Your credit score
- Your down payment amount
- Your loan type
- Your repayment term
A higher credit score can help you get a better interest rate. Generally speaking, mortgage borrowers with credit scores of 740 or higher may be eligible for the lowest available mortgage rates. A larger down payment can also drop your rate because it reduces your lender’s risk by shrinking the loan amount you’ll need to buy your home.
Mortgages with shorter terms tend to have lower interest rates. For example, the typical 15-year fixed-rate mortgage has an average 2.21% rate, while the average 30-year fixed-rate loan has a 2.81% mortgage rate, according to Freddie Mac’s latest Primary Mortgage Market Survey.
Rates also vary by mortgage lender, which is why it’s crucial to shop around. Identify three to five lenders and reach out for price quotes. Pay attention to and compare interest rate and closing costs estimates; you may end up saving thousands over your loan’s lifetime.
Methodology: The Joint Center for Housing Studies of Harvard University’s report analyzed 2019 data from the U.S. Census Bureau’s American Housing Survey. The analysis was published in February 2021.