Small loan amounts are offered at more expensive rates than those of higher amounts, according to an analysis of loan requests and quotes on Zillow Mortgages. Further, there are fewer lenders willing to lend to borrowers with small loan amounts, Zillow says.
Borrowers with loans of $100,000 pay 10% more for every dollar borrowed than borrowers with loans of $400,000. Zillow attributes this to higher interest rates and fees.
"Lenders go after big loan amounts and back-burner small loan amounts because even though they take the same amount of time to complete, the larger the loan amount is, the more a lender typically makes," said Erin Lantz, VP of mortgages. "Since there is less competition for small loan amounts, lenders offer higher interest rates to help cover the costs and many low- to middle-income borrowers have no choice but to pay more."
More than 25% of U.S. homes would have a mortgage of $100,000 or less if they put 20% down on the home.
The larger the difference is between the interest rate and the APR, the more it costs for the homebuyer per dollar borrowed. The average interest rate offered on a $100,000 home loan in the first quarter of 2015 was 3.95% with an APR of 4.06%; for a $400,000 home loan in the same period, 3.64% with an APR of 3.7%.
A borrower with a $100,000 loan would save 4% per month — $7,560 over the life of a 30-year fixed-rate loan — if offered the same interest rate and APR as a borrower of a $400,000 loan.
The lower the borrowers' loan amounts, the more limited their options for their home loan. Compared to borrowers seeking $400,000 loans, borrowers seeking $100,000 loans received half as many quotes from lenders.
Even lower loan amounts of $50,000 cost an average of 12% more than loans for $400,000. These borrowers were offered a 3.9% interest rate and 4.14% APR. There were 88% fewer loan quotes from one-sixth as many lenders, compared to quotes for borrowers seeking loans of $400,000.
