A large mortgage is not just a large mortgage. There are certain borrowing limits that determine whether your mortgage will fall into related loan category or large category.
These limits change every year, but in 2021 the corresponding loan limit for a single-family home will be $ 548,250. However, in some parts of the country, the limit is $ 822,375. These areas include Hawaii and Alaska, where property prices tend to be higher.
A big loan can be your ticket to your dream property. But be aware of these disadvantages.
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1. Usually you are stuck with a higher interest rate.
There is a reason why borrowers with high credit ratings are rewarded as competitive mortgage rates… Since the risk to lenders is less, borrowers receive some savings.
However, large mortgages are inherently more risky than matching loans because they involve large amounts of money. Thus, large lenders expect to be rewarded for taking on this risk in the form of higher interest rates.
At the time of writing, the average interest rate on a fixed mortgage for 30 years was 3.164%. Giant mortgage rates, on the other hand, are 3.23%.
This might seem like a small difference. But if you borrowed $ 700,000 at 3.16%, your monthly payments would be $ 3,015 in principal and interest, and you would spend a total of $ 385,411 on interest in paying off your home. At 3.23%, your monthly payment reaches $ 3,038 and your total interest increases to $ 393,679.
Of course, you might argue that the extra $ 8,268 at interest over 30 years is worth it to get more loans. But this suggests a slight difference in interest rates. Depending on where you live and what is yours credit rating it looks like the difference between the respective loan and the large loan may be larger in terms of the interest rate.
2. You will have to pay a larger down payment.
When you take out a regular mortgage, you can sometimes get away with less than 20% advance payment… But not with a large loan. Large lenders will almost always require a minimum down payment of 20%, which means that you will not only have to save more money before buying a home, but also invest more money in that home from the start.
3. You may face higher closing costs.
When you take out a mortgage, you pay a series of commissions to complete that loan, known as closing costs… Closing costs are usually calculated as a percentage of your loan amount, so the more you do, the more you pay.
But some of the big lenders may also charge higher fees because, in all fairness, they can. The market for large loans is more limited than for conventional loans, therefore mortgage lenders you don’t have to work that hard to be competitive. Thus, a large lender may charge you a higher application fee than you would pay for a qualifying loan, which in turn could increase your overall closing costs.
A large mortgage may be required if you are buying a more expensive home, and you don’t have to worry or fear if you can afford it. Just be aware of these pitfalls before applying.