Mortgages are still confusing… and it matters – How borrower attributes and mortgage shopping behavior impact costs

The variation across borrowers in the cost of a mortgage loan is profound. For 1.1 million loans acquired by Fannie Mae from 2017 to 2019, we estimate that average total mortgage cost, upfront cash plus note rate cost, is about $7,200 (or about 3 percent of purchase price). Other things equal, loans originated through mortgage brokers had higher lender fees, while those originated at credit unions had markedly lower costs. Borrowers who paid no upfront cash to their lenders had substantial savings. Borrowers who lived in a census tract with a greater share of adults with four years of college paid less than those in tracts with fewer such adults. The pattern of differences is similar for title and settlement charges, which we estimate to average $2,400 (or about 1 percent of purchase price). However, dollar differences are much smaller and variation is more driven by geography. In a special subset of borrowers who were surveyed on their shopping approach, all else equal, borrowers who obtained multiple quotes saw cost savings, whereas those who regarded the process as "too much of a hassle" fared particularly poorly.

Borrower race is an abiding issue in mortgage lending, but the differences across races are smaller than differences by lender type, shopping approach, or education. All else equal, mortgage costs for Black and Hispanic white borrowers were higher than for non-Hispanic white borrowers, and Asian borrowers had lower costs. The advantage to Asian borrowers appears to lie in getting lower rates rather than lower cash closing costs. Differences in costs are more pronounced when measured as a percent of purchase price, particularly among low-income borrowers. For non-low-income borrowers, while mortgage costs as a percent of purchase price are still higher for Black borrowers relative to their non-Hispanic white counterparts, total closing costs net of credits are marginally lower. Differences in title and settlement costs across borrower race and ethnicity groups, once accounting for geography, were not economically meaningful.

To learn more, read the full paper: Mortgages are still confusing… and it matters – How borrower attributes and mortgage shopping behavior impact costs (PDF)