Why will the bank only loan us 80% of the value of our fully paid for home?
To supplement existing answers: the appraised value does not necessarily represent the net amount the bank could actually recover with a foreclosure. Let's look at it from the point of view of the bank.  Suppose the property appraises at $200,000 and they do what you want: loan you $200,000 with the property as collateral.  Now suppose a short time later, you quit paying the mortgage and they have to foreclose.  Can the bank get their $200,000 back? An appraisal is only an estimate; nobody can predict perfectly how much a property will sell for.  Maybe the appraiser missed something significant, and the property will only fetch $180,000. Even if the appraisal was accurate when it was made, property values may have dropped in the meantime.  Maybe a sudden economic crisis is driving real estate prices down across the board.  Maybe interest rates have spiked.  Maybe the county has changed the zoning regulations to locate a toxic waste dump next door to the property.  In any of these cases, the property may again fetch well under $200,000. Maybe the condition of the property has changed.  Perhaps you trashed the place and it will take $30,000 to clean it up.  (People have a tendency to do things like that when they get foreclosed.) If the bank wants to get full market value for the property, they will incur the usual costs of selling a property: paying a real estate agent's commission, painting, renting furniture to stage the property, and so on.  This will eat into the net amount they actually get from the sale. It may take some time (perhaps months) for a property to sell at its full market value.  During this time, the bank is out $200,000.  That's money they would rather be loaning out at interest to someone else, so this represents lost income. Foreclosing a mortgage is a fairly complicated procedure.  The bank has to pay its staff, including lawyers, for a significant number of hours to get the foreclosure done.  There will be court filing fees and so on.  If you refuse to leave, they may have to get the sheriff to evict you; that has a fee as well.  If you fight the foreclosure, that racks up even more legal fees.  This too eats into the net proceeds from the sale. So if the bank loans you the full $200,000, they stand a pretty significant risk of not getting all of it back, after expenses.  You can understand that risk may not be worth the interest they would get from you on the extra $40,000. On the other hand, if they loan you only 80% of the property's appraised value ($160,000), they effectively shift that risk onto you.  Should you default on the loan, and they foreclose, all they have to do is sell the property for $160,000 or a little bit more.   That shouldn't be too hard, even if it is not freshly painted or a bit trashed.  They probably don't need to hire a real estate agent: just hold a quick auction, maybe first calling up a few investors who might be interested in flipping it.  If it happens to sell for more than the outstanding principal of the loan, plus the bank's costs, then they will pay you the difference; but they have no incentive to make that happen, and every incentive to just get it sold quick.  So any difference between the property's true value and the actual sale price now represents a loss to you first, not to the bank. So you can see why the bank would rather not loan you the full value of the property.  80% is a somewhat arbitrary figure but it cuts their risk by a lot. If you get a loan for 80% of the value of your house, that's equivalent to buying a house with a 20% down payment (assuming the appraised value is what you'd buy it for).  That's the minimum down payment for Fannie Mae backed loans without PMI (mortgage insurance).  See this table for more details. Freddie Mac (the other major mortgage backer) has a good fact sheet on cash out loans (which is what this is called) here.  It also specifies: Maximum LTV ratio of 80 percent for 1-unit primary residences  As noted in other answers, the 80% rule is to protect the bank (and ultimately, Fannie Mae and Freddie Mac, who will eventually buy most of these loans) so it is more likely to recoup the total value of the mortgage if they must foreclose on the house. Banks and lenders have become a bit more conservative since the housing crisis. 80% is a typical limit. The reason is to minimize the lender's risk if declining property values would put the borrower upside-down on the loan. http://www.bankrate.com/finance/home-equity/how-much-equity-can-you-cash-out-of-home.aspx The banks figure that they'll get 80% of the value of the property at a sheriff's sale. So, they're lending you what they think they can recover if you default. "I am going to add just one more item to what are some very well thought out answers. The element of ""Cash Out"" If you are taking out 80% of the value of the home that you already own free and clear the bank considers this a ""Cash Out"" transaction - meaning you would effectively walk away from closing with a check for 80% of your home's value. So in a hypothetical situation you have a $200,000 home value - you would be handed a check for $160,000 with which you could do anything that you wanted. Granted, you are likely going to do something responsible with it and purchase another home - BUT (big BUT) the bank can't control what you do with it and that is the part they don't like - and therefore they treat these types of transactions with a higher degree of scrutiny. It is all about control - if the property you are downsizing to fits their rules for lending they may actually loan you a higher loan to value on that purchase than they would on your ""cash out"" refinance transaction on your current home.  With the purchase loan the money you get goes immediately to the purchase of a new home.  In the ""cash out"" transaction it goes to a check with which you could do anything you want . . .  and then not pay the loan back . . .  I know no one here would do that - but there are some folks that would . . . and this is one of the reasons ""Cash Out"" loans are not nearly as easy as they once were to get. http://www.justice.gov/usao/az/mortgagefraud.html" Imagine the bank loaning 100% of the sum of money you needed to buy a house, if the valuation of the house decreases to 90% of the original price after 3 months, would it be unfair for them to ask them for 10% of the original price from you immediately? I suppose the rationale for loaning 80% is so that you will fork our 20% first, and so your property is protected from fluctuations in the market, that they do not need to collect additional money from you as your housing valuation rarely drops below 80% of the original price. Banks do need to make money too, as they run as a business.
If it's possible in your case to get such a loan, then sure, providing the loan fees aren't in excess of the interest rate difference.  Auto loans don't have the fees mortgages do, but check the specific loan you're looking at - it may have some fees, and they'd need to be lower than the interest rate savings. Car loans can be tricky to refinance, because of the value of a used car being less than that of a new car.  How much better your credit is likely determines how hard this would be to get.  Also, how much down payment you put down.  Cars devalue 20% or so instantly (a used car with 5 miles on it tends to be worth around 80% of a new car's cost), so if you put less than 20% down, you may be underwater - meaning the principal left on the loan exceeds the value of the car (and so you wouldn't be getting a fully secured loan at that point). However, if your loan amount isn't too high relative to the value of the car, it should be possible.  Check out various lenders in advance; also check out non-lender sites for advice.  Edmunds.com has some of this laid out, for example (though they're an industry-based site so they're not truly unbiased). I'd also recommend using this to help you pay off the loan faster.  If you do refinance to a lower rate, consider taking the savings and sending it to the lender - i.e., keeping your payment the same, just lowering the interest charge.  That way you pay it off faster. "Here are some important things to think about.  Alan and Denise Fields discuss them in more detail in Your New House. Permanent work.  Where do you want to live?  Are there suitable jobs nearby?  How much do they pay? Emergency fund.  Banks care that you have ""reserves"" (and/or an unsecured line of credit) in case you have a run of bad luck.  This also helps with float the large expenses when closing a loan. Personal line of credit. Who are you building for?  If you are not married, then you should consider whether building a home makes that easier, or harder.  If you hope to have kids, you should consider whether your home will make it easier to have kids, or harder.  If you are married (or seriously considering it), make sure that your spouse helps with the shopping, and is in agreement on the priorities and choices.  If you are not married, then what will you do if/when you get married?  Will you sell?  expand?  build another house on the same lot?  rent the home out? Total budget.  How much can the lot, utilities, permits, taxes, financing charges, building costs, and contingency allowance come to?  Talk with a banker about how much you can afford.  Talk with a build-on-your-lot builder about how much house you can get for that budget.  Consider a new mobile or manufactured home.  But if you do choose one, ask your banker how that affects what you can borrow, and how it affects your rates and terms.  Talk with a good real estate agent about how much the resale value might be. Finished lot budget. How much can you budget for the lot, utilities, permits required to get zoning approval, fees, interest, and taxes before you start construction? Down payment.  It sounds like you have a plan for this. Loan underwriting.  Talk with a good bank loan officer about what their expectations are.  Ask about the ""front-end"" and ""back-end"" Debt-To-Income ratios.  In Oregon, I recommend Washington Federal for lot loans and construction loans.  They keep all of their loans, and service the loans themselves.  They use appraisers who are specially trained in evaluating new home construction.  Their appraisers tend to appraise a bit low, but not ridiculously low like the incompetent appraisers used by some other banks in the area.  (I know two banks with lots of Oregon branches that use an appraiser who ignores 40% of the finished, heated area of some to-be-built homes.)  Avoid any institution (including USAA and NavyFed) that outsources their lending to PHH. Lot loan.  In Oregon, Washington Federal offers lot loans with 30% down payments, 20-year amortization, and one point, on approved credit.  The interest rate can be a fixed rate, but is typically a few percentage points per year higher than for a mortgage secured by a permanent house.  If you have the financial wherewithal to start building within two years, Washington Federal also offers short-term lot loans.  Ask about the costs of appraisals, points, and recording fees. Rent.  How much will it cost to rent a place to live, between when you move back to Oregon, and when your new home is ready to move into? Commute.  How much time will it take to get from your new home to work?  How much will it cost?  (E.g., car ownership, depreciation, maintenance, insurance, taxes, fuel?  If public transportation is an option, how much will it cost?) Lot availability.  How many are there to choose from?  Can you talk a farmer into selling off a chunk of land?  Can you homestead government land?  How much does a lot cost?  Is it worth getting a double lot (or an extra large lot)? Utilities. Do you want to live off the grid?  Are you willing to make the choices needed to do that?  (E.g., well, generator, septic system, satellite TV and telephony, fuel storage)  If not, how much will it cost to connect to such systems?  (For practical purposes, subtract twice the value of these installation costs from the cost of a finished lot, when comparing lot deals.) Easements. These provide access to your property, access for others through your property, and affect your rights.  Utility companies often ask for far more rights than they need.  Until you sign on the dotted line, you can negotiate them down to just what they need.  Talk to a good real estate attorney. Zoning. How much will you be allowed to build?  (In terms of home square footage, garage square footage, roof area, and impermeable surfaces.)  How can the home be used?  (As a business, as a farm, how many unrelated people can live there, etc.)  What setbacks are required?  How tall can the building(s) be?  Are there setbacks from streams, swamps, ponds, wetlands, or steep slopes? Choosing a builder.  For construction loans, banks want builders who will build what is agreed upon, in a timely fashion.  If you want to build your own house, talk to your loan officer about what the bank expects in a builder. Plansets and permits.  The construction loan process. If you hire a general contractor, and if you have difficulties with the contractor, you might be forced to refuse to accept some work as being complete.  A good bank will back you up.  Ask about points, appraisal charges, and inspection fees. Insurance during construction.  Some companies have good plans -- if the construction takes 12 months or less.  Some (but not all) auto insurance companies also offer good homeowners' insurance for homes under construction.  Choose your auto insurance company accordingly. Property taxes. Don't forget to include them in your post-construction budget. Homeowners' insurance.  Avoid properties that need flood insurance.  Apply a sanity check to flood maps -- some of them are unrealistic.  Strongly consider earthquake insurance.  Don't forget to include these costs in your post-construction budget. Energy costs.  Some jurisdictions require you to calculate how large a heating system you need.  Do not trust their design temperatures -- they may not allow for enough heating during a cold snap, especially if you have a heat pump.  (Some heat pumps work at -10°F -- but most lose their effectiveness between 10°F and 25°F.)  You can use these calculations, in combination with the number of ""heating degree days"" and ""cooling degree days"" at your site, to accurately estimate your energy bills.  If you choose a mobile or manufactured home, calculate how much extra its energy bills will be. Home design.  Here are some good sources of ideas: A Pattern Language, by Christopher Alexander.  Alexander emphasizes building homes and neighborhoods that can grow, and that have niches within niches within niches. The Not-So-Big House, by Sarah Susanka.  This book applies many Alexander's design patterns to medium and large new houses. Before the Architect.  The late Ralph Pressel emphasized the importance of plywood sheathing, flashing, pocket doors, wide hallways, wide stairways, attic trusses, and open-truss or I-joist floor systems.  Lots of outlets and incandescent lighting are good too.  (It is possible to have too much detail in a house plan, and too much room in a house.  For examples, see any of his plans.) Tim Garrison, ""the builder's engineer"".  Since Oregon is in earthquake country -- and the building codes do not fully reflect that risk -- emphasize that you want a building that would meet San Jose, California's earthquake code." "Concise answers to your questions: Depends on the loan and the bank; when you ""accelerate"" repayment of a loan by applying a pre-payment balance to the principal, your monthly payment may be reduced. However, standard practice for most loan types is that the repayment schedule will be accelerated; you'll pay no less each month, but you'll pay it off sooner. I can neither confirm nor deny that an internship counts as job experience in the field for the purpose of mortgage lending. It sounds logical, especially if it were a paid internship (in which case you'd just call it a ""job""), but I can't be sure as I don't know of anyone who got a mortgage without accruing the necessary job experience post-graduation. A loan officer will be happy to talk to you and answer specific questions, but if you go in today, with no credit history (the student loan probably hasn't even entered repayment) and a lot of unknowns (an offer can be rescinded, for instance), you are virtually certain to be denied a mortgage. The bank is going to want evidence that you will make good on the debt you have over time. One $10,000 payment on the loan, though significant, is just one payment as far as your credit history (and credit score) is concerned. Now, a few more reality checks: $70k/yr is not what you'll be bringing home. As a single person without dependents, you'll be taxed at the highest possible withholdings rate. Your effective tax rate on $70k, depending on the state in which you live, can be as high as 30% (including all payroll/SS taxes, for a 1099 earner and/or an employee in a state with an income tax), so you're actually only bringing home 42k/yr, or about $1,600/paycheck if you're paid biweekly. To that, add a decent chunk for your group healthcare plan (which, as of 2014, you will be required to buy, or else pay another $2500 - effectively another 3% of gross earnings - in taxes). And even now with your first job, you should be at least trying to save up a decent chunk o' change in a 401k or IRA as a retirement nest egg. That student loan, beginning about 6 months after you leave school, will cost you about $555/mo in monthly payments for the next 10 years (if it's all Stafford loans with a 50/50 split between sub/unsub; that could be as much as $600/mo for all-unsub Stafford, or $700 or more for private loans). If you were going to pay all that back in two years, you're looking at paying a ballpark of $2500/mo leaving just $700 to pay all your bills and expenses each month. With a 3-year payoff plan, you're turning around one of your two paychecks every month to the student loan servicer, which for a bachelor is doable but still rather tight. Your mortgage payment isn't the only payment you will make on your house. If you get an FHA loan with 3.5% down, the lender will demand PMI. The city/county will likely levy a property tax on the assessed value of land and building. The lender may require that you purchase home insurance with minimum acceptable coverage limits and deductibles. All of these will be paid into escrow accounts, managed by your lending bank, from a single check you send them monthly. I pay all of these, in a state (Texas) that gets its primary income from sales and property tax instead of income, and my monthly payment isn't quite double the simple P&I. Once you have the house, you'll want to fill the house. Nice bed: probably $1500 between mattress and frame for a nice big queen you can stretch out on (and have lady friends over). Nice couch: $1000. TV: call it $500. That's probably the bare minimum you'll want to buy to replace what you lived through college with (you'll have somewhere to eat and sleep other than the floor of your new home), and we're already talking almost a month's salary, or payments of up to 10% of your monthly take-home pay over a year on a couple of store credit cards. Plates, cookware, etc just keeps bumping this up. Yes, they're (theoretically) all one-time costs, but they're things you need, and things you may not have if you've been living in dorms and eating in dining halls all through college. The house you buy now is likely to be a ""starter"", maybe 3bed/2bath and 1600 sqft at the upper end (they sell em as small as 2bd/1bt 1100sqft). It will support a spouse and 2 kids, but by that point you'll be bursting at the seams. What happens if your future spouse had the same idea of buying a house early while rates were low? The cost of buying a house may be as little as 3.5% down and a few hundred more in advance escrow and a couple other fees the seller can't pay for you. The cost of selling the same house is likely to include all the costs you made the seller pay when you bought it, because you'll be selling to someone in the same position you're in now. I didn't know it at the time I bought my house, but I paid about $5,000 to get into it (3.5% down and 6 months' escrow up front), while the sellers paid over $10,000 to get out (the owner got married to another homeowner, and they ended up selling both houses to move out of town; I don't even know what kind of bath they took on the house we weren't involved with). I graduated in 2005. I didn't buy my first house until I was married and pretty much well-settled, in 2011 (and yes, we were looking because mortgage rates were at rock bottom). We really lucked out in terms of a home that, if we want to or have to, we can live in for the rest of our lives (only 1700sqft, but it's officially a 4/2 with a spare room, and a downstairs master suite and nursery/office, so when we're old and decrepit we can pretty much live downstairs). I would seriously recommend that you do the same, even if by doing so you miss out on the absolute best interest rates. Last example: let's say, hypothetically, that you bite at current interest rates, and lock in a rate just above prime at 4%, 3.5% down, seller pays closing, but then in two years you get married, change jobs and have to move. Let's further suppose an alternate reality in which, after two years of living in an apartment, all the same life changes happen and you are now shopping for your first house having been pre-approved at 5%. That one percentage point savings by buying now, on a house in the $200k range, is worth about $120/mo or about $1440/yr off of your P&I payment ($921.42 on a $200,000 home with a 30-year term). Not chump change (over 30 years if you had been that lucky, it's $43000), but it's less than 5% of your take-home pay (month-to-month or annually). However, when you move in two years, the buyer's probably going to want the same deal you got - seller pays closing - because that's the market level you bought in to (low-priced starters for first-time homebuyers). That's a 3% commission for both agents, 1% origination, 0.5%-1% guarantor, and various fixed fees (title etc). Assuming the value of the house hasn't changed, let's call total selling costs 8% of the house value of $200k (which is probably low); that's $16,000 in seller's costs. Again, assuming home value didn't change and that you got an FHA loan requiring only 3.5% down, your down payment ($7k) plus principal paid (about another $7k; 6936.27 to be exact) only covers $14k of those costs. You're now in the hole $2,000, and you still have to come up with your next home's down payment.  With all other things being equal, in order to get back to where you were in net worth terms before you bought the house (meaning $7,000 cash in the bank after selling it), you would need to stay in the house for 4 and a half years to accumulate the $16,000 in equity through principal payments. That leaves you with your original $7,000 down payment returned to you in cash, and you're even in accounting terms (which means in finance terms you're behind; that $7,000 invested at 3% historical average rate of inflation would have earned you about $800 in those four years, meaning you need to stick around about 5.5 years before you ""break even"" in TVM terms). For this reason, I would say that you should be very cautious when buying your first home; it may very well be the last one you'll ever buy. Whether that's because you made good choices or bad is up to you." Are you interested in refurbishing your rented home here in Singapore? If you are struggling with financial difficulties, you can apply for a renovation loan offered by banks. Most banks in Singapore offer renovation loans and home loans only to those who own a property. It is very hard to find a renovation loan for a rented home.  **Home loans for renovation**  You can take a home loan for your rented property and top up your home loan to finance your renovation project. If you already have a home loan, all you need to do is ask your bank representative to add extra financing to your [home loan](https://www.bankbazaar.sg/home-loan.html) for renovation purpose. Applying for a home loan for a rented property is simple. You can use an online loan calculator and compare home loans provided for a rented property. According to your repayment capacity and financial requirements, you can choose a home loan and use it for renovation. Make sure you have a good credit score while applying so that your home loan gets approved easily.  **Personal loans for renovation**  If you are not able to find too many home loans or renovation loans for rented property, you need not worry. Have you considered taking a personal loan to make awesome home improvement measures? That’s right; you can apply for a personal loan and use the funds to renovate your abode. The best thing about a personal loan is that a lender does not enquire about the purpose for your loan application. So, you can use your personal loan for any of your needs.  *Eligibility criteria for personal loans*  The general criteria to be qualified for a personal loan in Singapore are: The applicant should be 21 to 65 years old. The applicant should be a Singaporean or a permanent resident or a foreigner. The minimum income requirement for a Singaporean or PR is generally S$20,000 p.a. and S$40,000 p.a. for a foreigner.  **When are personal loans ideal for renovation?**  There are a few situations when a personal loan is the best option for renovating your rented property: Many banks give personal loans with attractive promotions such as interest-free loan for a certain period. You can take this loan and even repay the full amount before the zero-interest period expires. This will help you save efficiently on your renovation project. The minimum income required to secure a home loan is generally higher than the income requirement for a personal loan. Hence, a personal loan is a better option. A home loan generally gives a higher sum of money than a personal loan. This high amount is suitable for a construction project but will be excessive for renovation work. Therefore, it makes more sense to apply for a personal loan to give the perfect makeover to the kitchenette in your home. The approval process for a home loan is typically very lengthy. Personal loan applications get approved within 24 hours by most banks in Singapore. So now you can apply for a personal loan without any tension and remodel your balcony to have a party at home sweet home! Personal loan rates are generally lower than home loan rates. You can refurbish your living space by paying your loan at an interest rate not more than 4%. Now, you would have got a fair idea about how to finance your remodelling work. Always remember to enquire about every loan’s terms and conditions. Never sign any loan contract without being absolutely clear about the loan’s features. The bank doesn't want to loan you money to build a house on property you don't own. What happens if the owner gets mad at you and wants you to leave? What happens if the owner's will gives the land to somebody else? The bank would be taking a big risk. You need to buy the land before building the house. Even after the real estate crash, there are banks that lend money outside of the rules I'll share.  A fully qualified mortgage is typically run at debt to income ratios of 28/36, where 28% of your gross monthly income can apply to the mortgage, property tax, and insurance, and the 36% is the total monthly debt (including the mortgage, etc) plus car loan student loan, etc. It's less about the total loan on the potential than about these ratios. The bank may allow for 75% of monthly rent so until rentals are running at a profit, they may seem a loss, even while just breaking even.  This is just an overview, each bank may vary a bit. Let's look at the logical extreme. Two people get a house, no money down, 10 year mortgage. One moves out the day after the closing, and the gal left pays the full mortgage. Why in the world would the one who left be entitled to a dime?  You offer no information about the downpayment or amount paid during the time both lived there. That's the data needed to do any math. I'm not saying it's great, but I have a 705... I think we'll get a second opinion to lower that rate. Also, logically, with a higher down payment, we should be able to reduce the amount we need to borrow. Is that how that would work? For example, if we scrounged up a $7,000 for a down payment and came down on the price say $3,000