Why doesn't equity really affect lending rates?

The bank SHOULD assume that every borrower they lend to will default on their loan. So when the borrower defaults they need to know that when they foreclose or take a deed in lieu they will not get burnt on the loan.

Whether it is 80% LTV or 20% equity, maybe the bank feels that the remaining 20% equity will cover all the potential cost (legal, court, moving and storage, cleaning, brokerage) in taking the property.

A person with 50% of equity in the house (everything else the same) would be less risky than a person with 20% equity.

Just a few other thoughts. My guess is some of these people with "special rates" have a private banking relationship with a lender. In addition, some people you talk to are just stupid and incorrect, no disrespect.

60-66% is where a lot of LTV for new purchases that I see.

The relationship between LTV and lending rates is not linear. A loan is either in danger of being sold at a loss in a liquidation or it isn't. So at LTV's above 75-80 you either won't get the loan or you'll be charged a higher rate(For Super-Jumbos the LTV's need to be lower). Once the bank feels they are protected there's just no reason to reward you that much. You might see small benefits in going from 80-75% loan to value, but that's it. And other things do matter, like capacity to pay and debt to income ratios..

Thanks all for the explanation.

It seems like if lenders are requiring an amount to ensure they cover costs, this should be fixed - enough to hire a lawyer, initiate foreclosure, cover agent fees, resell in a short sale, etc. - which doesn't vary that much by property, I think. I guess it is a percentage to also cover the risk of depreciation in the value of the property?

I think the true answer to your question relates to the banks selling their loans to the government agencies, Freddie Mac, Fannie Mae and to a lesser extent GNMA. These agencies now account for more than 90% of new housing loans. A portion of their underwriting criteria includes a minimum of 20% down or PMI.

Since investors buy these government guaranteed housing loans, they don't care very much if there's a 20, 50 or 90% downpayment. The government should, which is part of the housing agecies' past criticism of poor underwriting standards. Since banks aren't making housing loans which they keep on their books and investors aren't buying non-agency mortgages, the government now sets virtually all underwriting standards. And the current standards are minimum 20% down and no discount for a higher percentage down.

Ethana,

It is not fixed because every situation is very different (situs of property, credit history, income etc.). There are also lending guidelines (ex: 60% of LTV) but nothing is set in stone.

All things equal (property situs, credit history, income etc.) it is safer to lend to someone with an LTV of 50% as opposed to 80%.

Depreciate the value of the property? Don't all homes go up in value, that is what I read on here.