Ask Money

A mortgage penalty for good savers?

Chris Farrell Jan 3, 2011

Question: I eventually plan on buying a home and for a number of years, been saving heavily. I figure I could buy a house without any problems because of the amount of cash I have. Now, I have been reading online that banks do not like to give a mortgage of less than approx 80k (on a 250-300k home) because it severely shortens the life of the loans and they don’t make that much on interest. Is it true that that I will have a difficult time getting a loan if I have too much money? Jiro, Nashua, NH

Answer: First of all, congratulations on taking a conservative approach to buying a home. Secondly, with sound finances you’re in a strong negotiating position with lenders and, don’t forget, with home sellers.

Mortgage loans under $80,000 or so are less profitable and, therefore, considered less desirable by lenders than making bigger mortgage loans. So, it can be a bit tougher to get a small mortgage.

However, if it does turn out to be an obstacle it’s a relatively easy one to overcome. You have a strong balance sheet when lots of people don’t.

I would shop around with different lenders, especially taking the time to visit with small community banks and local credit unions. Tell them what you’re doing and why. My guess is that they’ll want to add a low-risk sterling credit to their book of business. The disadvantages of a small mortgage loan from the lenders perspective loom larger with the giant impersonal mortgage companies.

From the numbers you sent in it’s clear you plan on making a very large down payment. You could simply cut back on the size of the down payment, say, to the 30% to 50% range on a $250,000 to $300,000 home. You would take out a 30-year (or 15-year) fixed rate mortgage with no prepayment penalty to pay for the difference. You’ll get the best interest rate available at the time. Since there’s no prepayment penalty you can get rid of the mortgage whenever you want out of additional savings.

You’ll be fine. Your savings gives you financial flexibility.

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