Fed study finds Native borrowers pay more interest on home purchases than white borrowers  

New research released by the Center for Indian Country Development at the Federal Reserve Bank of Minneapolis finds Native Americans pay more to finance home purchases than white borrowers. The report blames a disproportionately broad use of home-only loans on reservations. 

“Those are personal property loans used to purchase manufactured homes,” said CICD senior economist Matt Gregg. “So, it’s the composition of the loan products that are driving the higher prices paid by on-reservation Native borrowers.”

Gregg added home-only loans are not typically insured or guaranteed federally. 

“When a loan is insured by the federal government, the risk to the lender is borne by the federal government,” he said. “The loan becomes less risky and the benefits will flow to the consumer in the form of lower interest rates.”

The research found that even on-reservation borrowers with good credit scores “disproportionately use home-only loans.”

Greg said that results in more expense.

“The interest rate paid by an on-reservation Native borrower at the 90th percentile of interest rates is 9 percent,” he said. “Whereas the interest rate paid by a white borrower at the 90th percentile of white interest rates is roughly 5 percent.”

At that rate a white borrower would pay $50,000 in interest on a $75,000 home loan over the standard term length of 23 years by the time the loan matures. In contrast, Native American borrowers on reservations would pay $100,000. Although the disparity is greater for Native Americans living on reservations, it also affects those off reservations.

Gregg stressed the research findings are important for two reasons.

“This is honestly one of the few papers that dig into the research gaps that are so common among either tribal communities or just Native Americans in general,” he said.  

Secondly, he said the price of a home loan has knock-on effects on the rest of homebuyers' financial lives.

“It affects their standard of living, their budgets, their retirement savings,” Gregg said. “For many borrowers, the interest rate might affect their ability to even become a homeowner in the first place.” 

Gregg said future research should explore the reasons for the disproportionate use of home-only loans in tribal areas.