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Bigger Home Loans Mean Lower Costs

Smaller mortgages cost borrowers more, study finds

June 15, 2015

By JEFF OSTROWSKI The Palm Beach Post - Tribune News Service

In an example of the housing market's benefits accruing to wealthier homeowners, Zillow finds that the bigger your home loan, the better deal you'll get from lenders.

Compared to borrowers with $400,000 mortgages, homeowners with $100,000 mortgages pay 10 percent more for every dollar borrowed, because of higher interest rates and fees. What's more, borrowers with small loans find fewer lenders willing to lend them money, Zillow said.

"Many low- to middle-income borrowers have no choice but to pay more," said Erin Lantz, vice president of mortgages at Seattle-based Zillow.

But many in the mortgage industry see better deals for bigger loans as a matter not of class warfare but of simple common sense. Consumers accept paying less per ounce for a gallon of milk than a half-gallon, and the same concept applies to home loans, said John Councilman, president of National Association of Mortgage Brokers and a mortgage broker in Fort Myers.

"Economy of scale is a well-known factor to the American economy," Councilman said. "If you buy a giant size at the supermarket, it costs you less per unit."

Still, for first-time buyers struggling to buy into the housing market, the discrepancies might be hard to swallow.

The average interest rate offered on a $100,000 home loan in the first quarter was 3.95 percent, with an annual percentage rate of 4.06 percent, Zillow said. The average interest rate on a $400,000 loan was 3.64 percent with an APR of 3.7 percent.

The wider the gap between the interest rate and the APR, the more a borrower pays per dollar borrowed.

The typical borrower seeking a $100,000 loan received half as many loan quotes compared to similar borrowers seeking loans for $400,000, Zillow said.

Just as the supermarket pays the same rent and wages whether you buy a gallon or a half-gallon, mortgages carry fixed costs -- appraisals, surveys, the loan officer's time handling paperwork -- that are the same whether a loan is for $50,000 or $500,000.

"That's just basic math, and it's driven by the fact that there are fixed costs involved," said Ken Johnson, a real estate economist at Florida Atlantic University.

Mortgage brokers point to the Dodd-Frank act and other federal rules that followed the housing crash.

"All the government regulation has made loans more expensive for the consumer," said Ryan Brown, vice president at PMAC Lending Services in Palm Beach Gardens, Florida.

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