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Home prices are not sky-high in the entire country. And some homeowners only need to refinance a small loan balance. But do banks and mortgage companies require a minimum loan amount for you to buy or refinance a home?
- Mortgage programs backed by the government (FHA, VA and USDA) have no minimum mortgage amount
- Home loans backed by Fannie Mae and Freddie Mac do not require a minimum amount
- However, mortgage lenders almost always impose minimum mortgage amounts and/or extra fees for smaller loans
Many of the costs of originating a mortgage are fixed, such as those for underwriting and processing. However, most lenders charge borrowers a percentage of the loan amount. For a $30,000 mortgage, a 1 percent origination fee ($300) won’t come close to covering the lender’s costs. So you may pay several additional points to get a smaller loan.Verify your new rate (Dec 8th, 2019)
Who’s interested in minimum mortgage amounts?
People in the mortgage industry are used to being asked, “What’s the most I can borrow?” It’s much rarer for anyone to inquire, “What’s the smallest sum you’ll lend me?”
After recovering from the shock of such a question, most loan officers will reply, “We have no formal lower limits on new borrowing.” Expect (bet your shirt on it, if you can find someone to take the wager) their next word to be “But.”
Few lenders publish minimum loan amounts. But most — maybe all — impose one. We’ll get on to why that is soon.
Small loans make sense — to borrowers
That’s unfortunate. Because borrowing a relatively small amount at an ultra-low interest rate and spreading payments over years or decades is something many would like to do.
Some may want to buy in an area where home prices are low. And it’s easy to imagine people whose current mortgage balances are tiny benefiting from such loans.
Perhaps they want to help a grown-up child find the downpayment for a home. Or a family wedding’s looming. Maybe they’re facing unexpected medical bills. Or their home is getting tired and could use some minor remodeling. They don’t want to saddle themselves with a $250,000 debt, which was the average new mortgage at the end of 2017. But a relatively painless $30,000 or $40,000 would be very useful.
Unfortunately, they’d be very lucky indeed to find a mortgage lender who’d be willing to advance those sorts of sums.
Why lenders impose minimum mortgage advances
You may think the closing costs you pay on a purchase mortgage or refinance are steep. But those borne by the lender are also considerable.
According to the Mortgage Bankers Association, lenders had “production expenses” of $8,475 per loan in the last quarter of 2017. Those ever-increasing expenses mostly comprised staff costs. But they also included rent, heat, power, office equipment and all the other overheads every business has. As a result, the profit on each mortgage originated that quarter plummeted to $237.
And that, you’ll recall, was a time in which the average mortgage was about a quarter of a million dollars — or $254,291 to be precise. Given that most of those costs are fixed, small loans are bound to result in hefty losses.
Indeed, using those figures, one expert reckoned nearly $6,000 of the cost of originating a loan is unrelated to the size of that loan. No wonder lenders are at best unenthusiastic about small mortgages.
What in practice is the minimum mortgage?
Each lender can set any minimum it wants for new loans and refinances. So it’s impossible to establish for sure the lowest loan amount available.
But you’ll be lucky to find someone willing to advance less than $50,000. And many won’t engage with borrowers who want twice that much or even more. For example, some set a floor on loan values of $125,000. In other words, expect to have to shop around for your small mortgage.
Penalties for small loans
Even lenders who offer smaller mortgages often penalize borrowers who want them. You might, perhaps, have to pay an extra .25, .5 or even 1.0 points on closing.
Don’t get too mad. Paying a full 1 point on a $50,000 loan costs you just $500. And all the lender’s doing is trying to offset some of the loss it’s going to take originating your loan.
It’s not just lenders who are hit with high costs when originating low-value mortgages. Your closing costs will likely represent a much bigger proportion of your loan than they would if you were borrowing big.
That’s because many of those closing costs are fixed — or are disproportionately expensive — for small advances. Your home inspection, title search, appraisal … they and some other costs are all proportionately more expensive the less you’re borrowing.
All this means it’s worth running the figures for other sorts of borrowing that might meet your needs better.
Home equity loans
Home equity products come in two main flavors: home equity loans (HELs) and home equity lines of credit (HELOCs). They’re both forms of a second mortgage, which means they sit alongside your existing, main mortgage.
You can also get a home equity loan even if you don’t have a first mortgage.
Home equity loans tend to be fixed and come with costs similar to those of first mortgages — title charges, appraisal fees, etc., plus their rates are higher than those of first mortgages. But, they don’t usually include penalties for lower loan amounts.
HELOCs usually have variable rates and their set-up cost are low (or even zero), regardless of your loan amount
Compared with first mortgages, HELs and HELOCs tend to:
- Have only slightly higher interest rates
- Come with lower closing costs
- Have shorter terms, often five to 15 years
They each come with their own pros and cons, and you need to be sure you thoroughly understand those.
For small amounts, personal loans or even credit cards can be helpful. However, these come with higher or much higher rates and can prove expensive.
They do have the advantage of not being secured on your home. And their relatively short lives mean you could be debt-free sooner. Just make sure you have a plan to pay down card balances quickly.
Still, when borrowing tens of thousands, a home equity product (mortgage, refinance, HEL or HELOC) is likely to offer the lowest total cost of borrowing. And, unless you’re desperate, that should be your primary focus.Verify your new rate (Dec 8th, 2019)