Owning a home is a common way to build wealth, but it’s a problem when not everyone has an equal chance to buy one. This piece explores whether mortgage interest rates vary by race. A 2015 chart from Pew Research, which is relevant even now in 2024, shows mortgage rates by race.
To understand the chart, start with the ‘ALL’ row, which gives the baseline. Then, compare this percentage with the percentage for each race. For instance, 31% of all races had a mortgage rate between 3 – 3.9 percent. But only 25% of Black people and 38% of Asians had the same rate. This means 19.35% fewer Black people and 22.5% more Asians had a mortgage rate of 3 – 3.9 percent compared to all races.
Interestingly, mortgage rates between 4 – 5.9 percent are fairly consistent across all races. The ‘All’ row percentages are similar to the percentages for White people, likely because Whites are the majority race in America. It’s obviously better for a higher percentage of your race to pay the lowest mortgage interest rate.
So, why do mortgage interest rates vary by race? In an ideal world, we’d all get to refinance or take out a new mortgage at the lowest interest rate. But we live in a world where everyone starts with different levels of wealth.
The Fair Housing Act of 1968 was passed in America to prohibit discrimination in the sale, rental, and financing of housing based on race, religion, national origin, or sex. Housing discrimination in America has a long history. The Great Depression led to the establishment of the Home Owners’ Loan Corporation and the Federal Housing Administration (FHA), which promoted residential segregation by avoiding investments in city areas where people of color lived and by using restrictive covenants to keep middle-class neighborhoods white.
After the Housing Act of 1937, low-income public housing projects sprouted in inner cities, replacing slums and consolidating “minority neighborhoods.” Major road construction and suburbanization further segregated American cities. At the same time, Black Americans and 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. These discriminatory practices prevented people of color from accumulating wealth through homeownership.
So, what’s causing the different mortgage rates by race today? Decades of inequality have resulted in significant wealth differences among races. To avoid discrimination based on someone’s ethnic background, the Department of Housing and Urban Development (HUD) requires lenders to ask about borrowers’ race. HUD can then review lender records to ensure they aren’t routinely rejecting minorities or charging them higher fees.
Banks today are not purposefully deciding to charge a higher or lower rate by race. Instead, they focus on the creditworthiness of the borrower. Their main goal is to get paid back and earn a profit. The main reason why mortgage interest rates differ by race today is likely due to different levels of income and wealth by race. The higher your income and wealth, the lower your mortgage rate is likely to be.
During the 2008-2009 financial crisis, banks suffered huge losses. As a result, they have tightened their lending standards. For example, data from the NY Fed showed the average credit score for an approved mortgage borrower is around 760, up from ~720 in 2009.
Getting a mortgage is not always easy. In 2015, I, an Asian-American, was rejected from refinancing my mortgage. Despite having enough assets to cover all liabilities by 5X, I didn’t have the requisite two years of freelance income to qualify. 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 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.
Here are some tips to get lower mortgage interest rates for all races:
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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.
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Make more money. If you’re having trouble reducing your debt, then your only other alternative is to make a lot more money to get your debt-to-income ratio down.
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Raise your credit score. To get the lowest mortgage interest possible with the lowest fees, you now need to have a credit score of 800+.
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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.
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Promise more business. Banks want to do business with long-term customers they like.
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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.
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.
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.
Investing in real estate is a powerful way to build wealth. In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $954,000 with real estate crowdfunding platforms. It was a great way to diversify away from expensive coastal city real estate.
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