Loan to Value

When a lender is determining whether to approve your home mortgage application, they will look at the loan to value (LTV) rating of the property you intend to purchase. The LTV is a ratio that helps the bank determine the risk of lending money on a property. The ratio compares the value of the loan (the amount of money the homebuyer intends to borrow) to the appraised value of the property. To calculate the LTV, the bank will divide the lower number by the higher number. For example, if you borrow $100,000 on a property that is appraised for $150,000, the LTV will be 67%. The other 33% is the money that the buyer has invested in the property. The higher the LTV, the riskier the lender considers the loan. The loan to value can change over time without any action from the homeowner. If the property value appreciates or depreciates, the LTV will adjust accordingly.

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When LTV ratio Impacts the Loan

The bank will review the LTV to determine the value of loaning money on a property. If a property has a LTV ratio that is higher than 80%, the bank will require private mortgage insurance (PMI) to secure the loan. Once the homeowner has 20% equity vested in the loan, the PMI will no longer be required. One way to quickly lower the loan to value ratio is to offer a large down payment on the home. The more money the buyer invests up front, the less money the bank needs to invest in the loan.

Combined Loan to Value Ratio

If you have more than one mortgage open on a property, the bank will calculate the combined loan to value ratio. The aggregate of the total money owed divided by the selling price or appraisal price (whichever is higher) of the property will indicate the combined loan to value ratio.

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Refinancing and LTV

If you are thinking about refinancing your home, the loan to value ratio can come into play. The bank will determine the appraised value of the property by comparing it to other similar properties that have sold in the same area over the last three months. The more equity you have in your home, the lower your LTV ratio will be. If you have a lower home to value ratio, you will most likely be a candidate for a lower interest rate, and more favorable terms. Additionally, if you are planning to refinance with a cash back at closing option, you will need to have at least twenty percent equity in your home.