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Zillow released a mortgage analysis of loan requests and quotes finding that borrowers with loans of $100,000 pay 10 percent more for every dollar borrowed due to higher interest rates and fees compared to borrowers with $400,000 home loans. Furthermore, borrowers with small loans tend to have trouble finding lenders to lend to them.
"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, Zillow 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."
The analysis also found that more than one-quarter of all U.S. homes would have a mortgage of $100,000 or less if 20 percent were put down on the home. In comparison to borrowers with high loans amounts, and credit score and loan-to-value ratios being held equal, borrowers with small loan amounts were offered more expensive loans.
For a $100,000 loan, the average interest rate was 3.95 percent with an APR of 4.06 percent for Q1 2015, the data found. In contrast, the average interest rate for a $400,000 home loan was 3.64 percent with an APR of 3.7 percent for Q1 2015. The gap between the interest rate and the APR determines the cost to the buyer per dollar borrowed. Borrowers with low amounts also received half as many quotes and limited options from lenders compared to those looking for a larger amount.
If all borrowers had loans that were created equal, with the same interest rate and APR, low borrowers would save 4 percent per month or $7,560 over the life of a 30-yr fixed rate loan, the analysis concluded. Lower loan amounts of $50,000 offered at an average interest rate of 3.9 percent with an APR of 4.14 percent cost 12 percent more than loans for $400,000 and still had 88 percent fewer loan quotes from one-sixth as many lenders.
