How To Find Small Mortgages In A World of Big Loans

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Getting a smaller mortgage should be fairly easy, but that’s often not the case for those who want to borrow $125,000 or less. This may seem strange because a lower loan amount suggests little lender risk, yet such loans are frequently hard to find.

How can this be? And what can you do if you want a smaller loan and lower costs?

When Size is a Loan Factor

For most borrowers, loan size is not a problem. According to the Mortgage Bankers Association, at the end of November 2023, the typical loan amount to buy a home was $403,600.

Many borrowers, however, want smaller amounts, perhaps $100,000 or less, enough to pay such costs as medical bills, small mortgage balances, college tuition, home renovations, or to start a new business. 

These “smaller” loans are often hard to find, mainly because of lender economics. Here’s why.

First, lenders have fixed costs that must be paid with each transaction. Smaller loans may not generate enough income to generate lender interest. 

Second, federal rules limit the fees and points lenders can charge for most loans. The limits for 2024 look like this.

  1. For loan amounts of $100,000 and above: Total points and fees cannot exceed 3% of the total mortgage amount.
  2. For mortgage amounts greater than or equal to $60,000 but less than $100,000: $3,000.
  3. For loans greater than or equal to $20,000 but less than $60,000: 5% of the mortgage amount.
  4. For loans greater than or equal to $12,500 but less than $20.000: $1,000.
  5. For mortgages less than $12,500: 8% of the loan amount.

The reason for the inverted fee schedule with higher fees for smaller mortgages is to encourage more lender activity and make smaller loans more widely available. 

How to Get Smaller Mortgages

There is a market for smaller mortgages, and there are several ways to get the financing you want and for which you are qualified.

If you’re a current property owner you may have significant equity, especially if you bought before the pandemic. A second loan can allow you to keep your current financing in place while pulling additional equity from the property with additional financing.

Lenders will generally provide 80% financing and sometimes more. 

As an example: You have a property with a $400,000 fair market value. The current loan balance is $250,000.

Lenders in this case will likely provide as much as $70,000 in additional financing for qualified borrowers. ($400,000 x 80% = $320,000. $320,000 less $250,000 in existing debt = $70,000.)

Look for HELOCs

Another way for current homeowners to access equity is by using a HELOC – a home equity line of credit. This is somewhat like a credit card secured by real estate but with a twist. 

In Phase I, you can borrow up to the credit limit for a given period, say 10 or 15 years. With many HELOCs you can also make large repayments

In Phase II, any balance remaining from Phase I becomes a debt that must be repaid over the next 10 or 15 years with regular monthly payments. 

There are several cautions with HELOCs: 

First, borrowers can face big monthly payments in Phase ll because it has a relatively short payback period. This concern disappears if the property is sold or refinanced before Phase II begins, something likely for many if not most borrowers.

Second, most HELOCs have an adjustable interest rate that can go up or down rather than a fixed rate.

Third, ask lenders about specific HELOC terms. For example, Experian points out that “some HELOCs do not allow principal repayment during the draw period or charge prepayment penalties for repaying your balance early.

Check with the lender or review your HELOC documents to see whether your lender charges a prepayment penalty. Depending on how much interest you can save by paying off your balance early, it may be worth the tradeoff of paying a prepayment fee.”

Fourth, if property values go down or lenders think payments won’t be made because of weakening borrower finances, they can “reduce or suspend credit limits” according to the FDIC. In other words, lenders may be able to freeze withdrawals in certain circumstances.

FHA Title 1 Small Loans

If you need a small amount for home repairs then consider FHA Title 1 financing. This small loan comes in two forms.

First, if you borrow less than $7,500 you may not need a closing of any type. In essence, your promise to repay is enough to get a check, but you have to repay within six months.

Second, you can borrow up to $25,000 for 20 years if you’re fixing up a single-family home.

The use of Title 1 financing is restricted to certain improvements.

According to HUD, “FHA-insured Title 1 loans may be used for any improvements that will make your home basically more livable and useful. You can use them even for dishwashers, refrigerators, freezers, and ovens that are built into the house and not free-standing.”

What you can’t do is use Title 1 for “certain luxury-type items such as swimming pools or outdoor fireplaces, or to pay for work already done.”

Title 1 financing can be used to increase accessibility for a disabled individual. Allowable improvements include “remodeling kitchens and baths for wheelchair access, lowering kitchen cabinets, installing wider doors and exterior ramps, etc.” 

Lastly, Title 1 financing can also be used to improve energy conservation or install solar energy systems. 

The bottom line: Small mortgages are out there. If you have home equity and a need for a smaller loan, then search for practical options such as second mortgages, HELOCs, or Title 1 financing.

Peter G. Miller

Peter G. Miller is a nationally-syndicated columnist, the author of seven books published originally by Harper & Row (including one with a co-author), and has contributed to leading online sites and major print publications. He has appeared on numerous media outlets including the Today Show, Oprah!, CNN, and NPR.

Peter has been an accredited correspondent on Capitol Hill and a member of the White House Correspondents Association. He has served with the District of Columbia National Guard and holds both BA and MS degrees from The American University in Washington, DC. View Peter on LinkedIn.

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