The high cost of low-income mortgages: Evidence from national-level data

• In Event: Financial Fragility and the Price of Credit: Payday Lending, Safety Nets, and Mortgage Costs

Abstract

Background/Purpose: Access to mortgage credit is only one dimension of inequality in housing finance; the cost and structure of borrowing jointly determine whether homeownership is affordable and wealth-building for low-income households. While prior research shows that disparities in mortgage pricing are substantially attenuated after conditioning on borrower risk and loan characteristics (Bhutta, Hizmo, & Ringo, 2025; Hurtado & Sakong, 2024), less attention has been paid to how multiple dimensions of loan pricing and structure combine to shape the total cost of borrowing. This study examines the cost of financing a home purchase for low-income borrowers by analyzing not only mortgage rate spreads, but also upfront costs, loan size, and loan structure within tightly defined lending environments. 

Methods: Using data from more than 20 million mortgage originations between 2019 and 2024, this study estimates models of mortgage rate spreads, total loan costs relative to loan size (cost ratios), the prevalence of small-dollar mortgages (those below $150,000) and alternative loan structures. Low-income borrowers are defined as those in the bottom 10 percent of the income distribution. Key covariates include borrower race/ethnicity, loan characteristics (loan-to-value ratios, debt-to-income ratio, loan type), and neighborhood indicators (tract minority composition, and low-income tract designation). The empirical strategy employs high-dimensional fixed effects that absorb census tract and lender-by-year variation, enabling comparisons among borrowers facing the same lender in the same local market and time period. 

Results: Results show that low-income borrowers face higher costs of financing across multiple dimensions. They experience modest but statistically significant increases in mortgage rate spreads, as well as higher cost ratios, indicating greater upfront costs relative to loan size. These patterns are particularly pronounced among small-dollar mortgages, where fixed transaction costs translate disproportionately higher borrowing costs. Low-income borrowers are also more likely to rely on loan structures associated with higher pricing, including FHA loans, though some cost differences are attenuated within this program. Racial differences in pricing persist but remain relatively small in magnitude compared to differences associated with income and loan structure. Taken together, these findings indicate that disparities in the cost of financing are embedded not only in interest rates, but in the broader structure of mortgage products available to low-income borrowers. 

Conclusions and Implications: These findings suggest that even in a lending environment where pricing disparities appear limited on a single margin, low-income borrowers face systematically higher costs of financing due to the interaction of pricing, loan size, and product structure. This reinforces the broader pattern that inequality in mortgage markets is most pronounced at the point of access, while extending the literature by showing that the affordability of financing terms remains a critical and underexamined dimension of inequality. For policy and practice, results imply that expanding access to credit is necessary but not sufficient; reducing the cost burden associated with small-dollar lending and improving the availability of lower-cost loan products may be essential for ensuring that homeownership serves as a viable pathway to wealth accumulation for low-income households.

Author

• Patrick Meehan, University of Michigan
  Presenting Author