Helpful Mortgage And Real Estate Advice

What Is Loan-To-Value (LTV), And How Does It Affect The Size Of My Loan?

By on November 11, 2013 in Mortgage Videos

Your home loan is a lesson in math when comparing down payment and ultimate loan amounts. A loan-to-value, or LTV, is a ratio of your loan amount compared to the home’s appraised value. Your lender uses this ratio to decide on loan amounts that are safe for both the buyer and bank.

The Calculation

If your home is appraised for $100,000, for example, and you apply a $25,000 down payment, your LTV is 75 percent or 0.75 when expressed as a ratio. You own 25 percent of the property while the bank owns 75 percent. This ratio varies each month as you slowly pay the principal down. Assuming that home prices rise at a steady pace with a current mortgage payment schedule, your LTV slowly drops down to zero when the property is fully paid off.

High LTV

Lenders scrutinize home loans in this volatile economic climate. Currently, most LTV ratios need to be 80 percent or lower. If you have impeccable credit, for example, a lender may be inclined to loan you funds at a higher LTV. However, the bank still needs to protect itself from possible loan default.

Private mortgage insurance, or PMI, is an additional bill that you must incur if you have an LTV higher than 80 percent. This insurance protects the bank if you fail to pay the loan back. The property, or asset, does not strike their books as a huge loss, allowing them to recover the home and sell it without much stress.

Once you faithfully pay the loan down to an LTV lower than 80 percent, you are able to cancel the PMI. Without this insurance bill, your monthly mortgage payment drops substantially, depending on the initial insurance amount.

The Appraisal

If possible, attend the appraisal process at the prospective property. Do not question the appraiser during their inspection, but engage them after they have completed the work. You can see the report they have written up to verify it is correct. Point out any values that you believe may have been overlooked to achieve the most honest appraisal of the property. If a garage door is decaying from weathering, for example, this depreciation should reflect in the home’s value. Your LTV can be impacted significantly with an incomplete appraisal.

Take part in the home loan process to see how your down payment, the lender’s funds and the property’s value mesh together into a reasonable mortgage payment. Purchasing or refinancing a home takes considerable attention to math calculations and appraisal values.


About the Author

About the Author: Jessica Lucas is the managing editor for Mortgage Home Base, a top real estate finance blog dedicated to helping borrowers and home buyers understand the home loan process. Follow Jessica on Google +, and share your comments here. .
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