How Home Value Influences Mortgage Amounts
Most people are aware that there is a connection between the value of their home and the amount that they are able to borrow with their mortgage. However many are not aware of exactly what this connection is. In general it is fairly straightforward as the amount that you can borrow is calculated to make sure that the bank is protected if you are unable to make your payments.
The obvious way that your home's value affects mortgage amounts is that it limits the amount of money that will be loaned. No banker anywhere is going to give you a mortgage for
more than the value of your home. The reason for this is that they need to be able to get their money back in the event that you are unable to make your payments. This requires that
they not lend you more than the value of your home since they obviously would not be able to sell it for the amount that you owe in that case.
In reality you won't actually be able to borrow up to the value of your home anyway. Again this has to do with the need to be able to recoup the money that is loaned in the event of default. The reason is that if the most likely reason that people will not be able to pay their mortgages is that there has been a downturn in the economy which will likely lower the value of houses. That means that they will have to sell any houses that they repossess for less than there full value. As a result they banks will always require a significant down payment before they will furnish a mortgage.
The requirement for a down payment is actually made by the government which requires it as a law. This is done because if the mortgages go bad and the banks start to fail it will be the government that is one the hook to bail them out. For this reason there is normally a requirement that at least ten percent of the value of the house be put down before a mortgage is granted. This is done to make sure that there is equity in the house in the event of a foreclosure. While normally ten percent down is a requirement there are ways to get around this. For example lenders like My Aurora Loan will often have programs in place that allow you to purchase a home with a lower down payment.
The reason that there are programs which allow the purchase of homes with less than ten percent down is that these mortgages require the borrower to take private mortgage insurance. This is done to make sure that if you are unable to make your payments the bank will get its money from the insurer. This will increase the amount that you have to pay each month but it will allow you to borrow more with your mortgage.