A new study reveals that most U.S. home buyers are overpaying mortgage fees, a market totaling more than $13 billion a year.
The report also finds that searching for lower costs can save consumers an average of $32 in fees and more than $1,000 in interest per loan, making competitive pricing a consumer's best defense against overpayment.
"If they have a chance, lenders will definitely make borrowers pay higher fees," said Cheng "Cathy" Zhang, Ph.D., a postdoctoral associate in the University of Florida's Warrington College of business and author of the study. "To reduce that overpayment, there are things home buyers can do: shopping, using brokers or using simplified loans, like zero-fee loans."
Of all those fee-busting options, shopping around saved the most, in both fees and interest rates, Zhang found. With many lenders offering instant quotes online, shopping may not even take that long.
But consumers routinely report that they're unaware that mortgage fees and total costs vary a lot by lenders, leaving them vulnerable to paying more than they need to.
"It's just because they don't know. Just one small step might be able to save them a lot," Zhang said.
While researchers have previously looked at the market for mortgage rates, lenders did not have to report other costs, like origination fees, until recently. Starting in 2018, the Consumer Financial Protection Bureau started collecting and sharing data on the total costs of mortgages, including these fees.
In her study, Zhang found that the fees average around 1-3% of the mortgage, or a little over $1,000 on an average loan of about $269,000. Some fees can approach 8% of the loan, however. On the other hand, some lenders will roll the fees into the interest rates borrowers pay over time. These types of loans, known as simplified or zero-fee loans, can actually save borrowers on overall costs, Zhang found.
Not everyone is overpaying, though. Savvy home buyers, those who've purchased homes in the past or people with higher incomes are more likely to end up paying less.
"Overall, people are overpaying for mortgage fees," Zhang said. "But it's largely driven by less sophisticated borrowers. For example, lower income borrowers, or those with less education."
The study was published Oct. 31 in the Journal of Real Estate Finance and Economics.
