There is no legally mandated minimum amount for a mortgage. However, the low profit margins, high costs and risk of having property as collateral make this type of financing less common for small loan amounts. It may make financial sense for borrowers who face a small mortgage amount to look at alternative, unsecured sources of financing to accomplish their goals.
What Is a Mortgage?
Mortgages – also known as liens against or claims on property – are loans that are backed by a specific piece of property or real estate. Mortgages are usually broken up into predetermined payments that are paid over a fixed period of time (for example, 30 years). Each payment is composed of a portion of principal and interest payments. Mortgages allow the average American to own property without paying the entire cost of the property up front.
Minimum Amount for a Mortgage
There is currently no legal minimum amount for a mortgage loan. However, the costs associated with originating a mortgage loan can provide a disincentive for both lenders and borrowers to use this type of financing for small loan amounts. Mortgage loans usually have several costs, such as loan origination fees, taxes, home appraisal, and prepaid escrow, built into them. Collectively, these costs are referred to as closing costs.
Little Profit for Lenders
From the lender's perspective, a smaller principal amount generates less income from the loan in the form of interest. As a result, loan amounts below $100,000 usually have relatively higher fees. Also, it can be difficult to find financing for a loan amount below $50,000. However, some community banks and credit unions offer mortgage loans for as little as $10,000.
High Costs for Borrowers
From the buyer's perspective, the closing costs associated with a mortgage loan are higher than other types of financing. These costs can easily run thousands of dollars, making this a very expensive option for individuals who only need to borrow a relatively small amount of money. A better option for individuals who wish to obtain financing for a small loan may be to seek out other, relatively less expensive options such as a personal loan.
Risks of a Small Mortgage
A defining characteristic of a mortgage loan is that it is backed by property or real estate that acts as collateral for the loan in case the borrower defaults. This can make a mortgage loan, as opposed to an unsecured source of financing, risky for the borrower if she cannot make the payments. If the borrower defaults, she could lose the property that serves as collateral for the loan.
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