Mortgage Costs as a Share of Housing Costs—Placing the Cost of Credit in Broader Context

Abstract

Housing affordability is a key policy concern and an important factor in fostering sustainable homeownership. Housing costs in turn are a critical contributor to affordability. In this paper, we focus on the different components of housing costs to show the contribution of each expense to overall housing costs, specifically focusing on a breakdown of mortgage costs. We use internal Fannie Mae loan acquisition data matched with closing costs data to establish a pro forma of housing costs for three average owner-occupant borrower profiles over a typical owner’s seven-year period (all purchases, first-time homebuyers, and low-income first-time homebuyers). We find that the biggest contributors to overall housing costs are transactions costs, ongoing utility expenses, property taxes, home improvement costs, and the component of the mortgage interest rate that compensates investors for the time value of money. The guaranty fees charged by the GSEs and private mortgage insurance are estimated to be less than six percent of the cost of homeownership.

Keywords: mortgages, housing affordability, homeownership

JEL Classification: G21, G28, L85, R21, R31