Anew study finds that closing costs on home loans vary widely and that African Americans, Latinos and people in neighborhoods with fewer college graduates tend to pay more. So do people who got their loans through mortgage brokers instead of directly from a bank or thrift.The study was commissioned by the Department of Housing and Urban Development, which has been trying since 2002 to standardize and improve the way closing costs are disclosed in the good faith estimate delivered to borrowers when they apply for a loan. HUD is accepting comments on its proposed revisions to the document through June 12.
The study was conducted by Susan Woodward, founder of Sand Hill Econometrics in Palo Alto and a former chief economist with HUD and the Securities and Exchange Commission.
Woodward examined 7,560 home loans made through commercial lenders and insured by the Federal Housing Administration. All were 30-year fixed-rate loans for home purchases closed in May and June of 2001.
Total loan charges averaged almost $3,400 on loans with an average balance of $105,000, the study found. These fees included $1,500 in cash plus $1,900 in yield spread premium.
This premium is hard to understand but here’s how it works. When you take out a loan, the broker has a rate sheet that shows how much a mortgage wholesaler will deliver at closing for loans at various interest rates.
Using a 2001 rate sheet from the report, for a $100,000 loan at 8.25 percent, the wholesaler will pay $100,500 at closing. The extra $500 goes to the broker, who can keep it or pass some or all of it along to the borrower.
For the same loan at 8.5 percent, the lender will deliver $101,375, giving the broker $1,375 to pocket or pass along. This extra amount is known as the yield spread premium. Consumers pay for it, indirectly, through higher rates.
Banks and brokers both collect these premiums, but only brokers have to disclose it. Many borrowers overlook it because it’s not listed like other closing costs.
Woodward found that yield spread premiums averaged $2,400 on brokered loans and estimated that premiums for direct loans averaged $1,800.