Do U.S. Borrowers Overpay Mortgage Fees?

This study delves into the often-overlooked aspect of mortgage costs: origination fees. While interest rates have been extensively studied, origination fees have received less attention, despite their substantial impact on borrowers. The research reveals that borrowers frequently overpay these fees, with evidence showing a positive association between fees and interest rates, indicating a lack of trade-off between the two. The study also documents significant fee dispersion, suggesting that many borrowers pay more than necessary. The research identifies that less sophisticated borrowers, such as those with higher loan-to-value ratios, minority borrowers, and those in lower-education areas, are more likely to overpay. To quantify lender profits, the study compares loans to external borrowers with those to the lender's own employees, finding an average profit markup of 51%. The study then explores practices that could help reduce fee overpayments, including shopping across lenders, engaging mortgage brokers, and adopting simplified loan pricing structures. Shopping is found to reduce fees and interest rates, with more significant savings for those who shop for better terms. Engaging brokers also leads to lower overall costs, despite higher fees, due to reduced interest rates. Simplifying the mortgage pricing structure, particularly when done by borrowers themselves, results in the largest cost savings. Overall, the study provides systematic evidence of mortgage origination fee overpayment and evaluates simple solutions to reduce overall borrowing costs, contributing to ongoing regulatory and policy discussions.