CAMBRIDGE, Mass., Oct. 7, 2020--Despite the fact that mortgage rates are at an all-time low, recent research done at the Sloan School at MIT demonstrates that African Americans continue to pay more than other groups to be homeowners—a disparity that adds $67,320 to the cost of homeownership and contributes roughly half of the current $130,000 gap between Blacks and whites in liquid savings at retirement.
A new paper entitled, The Unequal Costs of Black Homeownership, by Edward Golding, Executive Director of the MIT Golub Center for Finance and Policy and co-authors, Michelle Aronowitz and Jung Choi demonstrate that African Americans pay more in interest, mortgage insurance and property taxes than any other group. The paper will be discussed at a conference hosted by the Golub Center on Wednesday, October 14.
The overall differences in mortgage interest payments ($743 per year), mortgage insurance premiums ($550 per year), and property taxes ($390 per year) when invested over the 30 years results in $67,320 in lost retirement savings for black homeowners. These inequities make it impossible for black households to build housing wealth at the same rate as white households.
In today’s housing finance system, risk-based pricing is the norm. Mortgage rates increase as down payments and credit scores decrease. But how to distribute risk—pooled among all borrowers or distributed unevenly among borrowers, is a policy choice. For historical reasons, largely rooted in past discriminatory policies and practices, black homeowners on average have lower credit scores and lower down payments and thus are disproportionately disadvantaged by risk-based pricing, and yet, that is the pricing system that predominates today.
“While mortgages costs are determined by markets to some extent,” says Golding, “There is a great deal of public policy that influences these rates especially as it impacts people of color. We can and should address these issues at a policy level and start now to eliminate the large wealth gap between Black and white homeowners that we created in part through our current mortgage system.”
Golding’s paper outlines possible changes to programs at the federal, state and local level.
Golding’s paper can be seen in its entirety here: https://gcfp.mit.edu/mortgage-cost-for-black-homeowners/
This study was done as part of a new report from the National Association of Real Estate Brokers on the State of Housing in Black America. See report here: https://www.nareb.com/shiba-report/
The MIT Sloan School of Management
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