Mortgage Loan Costs: Magnitude and Drivers of Variation

Abstract

This article uses national data disclosed as part of the Home Mortgage Disclosure Act (HMDA) to examine variations in loan costs based on type of loan, borrower, purpose (purchase, improvement, or refinance), and neighborhood characteristics. Loan costs are generally higher for nonconventional conforming loans with higher levels of credit risks (loans with higher combined loan-to-value, higher debt-to-income ratios, and for investment properties). This implies that product and borrower risk impact loan costs. However, borrower characteristics such as income and race/ethnicity are also associated with differences in loan costs even after controlling for loan characteristics, location, and lender fixed effects. Total loan costs are higher both in dollar terms and as a share of the loan amount for Black borrowers and Hispanic borrowers, and total loan costs represent a higher share of the loan amount for lower income borrowers. These disparities are larger in neighborhoods with higher levels of lender concentration and implicit racial bias. These findings suggest that in addition to access to mortgages and interest rates, loan costs can represent a barrier for access to homeownership with a disparate impact for Black and Hispanic borrowers, which contributes to perpetuate the homeownership gap.