While looking into the purchase of a home, you should become familiar with the LTV(Loan To Value) ratio while looking into pre-qualifying for a home loan from a bank. Called the loan-to-value ratio, this number is determined by the amount of the first mortgage lien and how much the property is actually worth.
An example of this ratio would be if you were wanting to borrow $180,000 to purchase a property and home valued at $224,000. This creates the following equation-(Amount of first mortgage lien) / Real property value = LTV. For our example, this would equate to- $180,000 / $224,000 =.8035, or 80%.
If a loan-to-value ratio is greater than a pre-set amount, which is usually around our example 80%, the lender may require mortgage insurance on the loan. The borrower will then need to put a minimum of 20% down to avoid paying any mortgage insurance premiums, and in turn protects the lender from a default. The amount of the mortgage insurance will then be added to the mortgage payment every month.
This figure is used along with other factors to determine the risk a mortgage lender carries with the borrower. Risk of default is always at the forefront of any home loan lender's choice, and the LTV is a very important factor to be considered.
Lenders also set up their payment tiers by the LTV, and your credit score is a big factor in that determination. The differences in these attributes can increase or decrease your interest rates by as much as a full point, or as little as a quarter percent.
Simply said, the lower your loan-to-value ratio, the amount borrowed is less, the lender perceives you carrying lower risk, therefore lowering your interest rates, and you own more equity in the home. Having a great credit score, a solid borrowing history, and a good down payment for the loan will all be additional factors in the amount you will pre-qualify, or be pre-approved for.
The Loan-to-Value Ratio is also used during the calculation in the refinance of a property. Many mortgage lenders will offer a maximum rate of 75% the appraised value, or a 75% loan-to-value ratio for the amount of the new loan. If a borrower asks a lender for more than 75%, the lender will typically charge higher interest rates. Utilizing this information, you should feel confident in knowing what a loan-to-value ration is, how it's calculated, and how it affects your loan amounts, as well as interest rates.
An example of this ratio would be if you were wanting to borrow $180,000 to purchase a property and home valued at $224,000. This creates the following equation-(Amount of first mortgage lien) / Real property value = LTV. For our example, this would equate to- $180,000 / $224,000 =.8035, or 80%.
If a loan-to-value ratio is greater than a pre-set amount, which is usually around our example 80%, the lender may require mortgage insurance on the loan. The borrower will then need to put a minimum of 20% down to avoid paying any mortgage insurance premiums, and in turn protects the lender from a default. The amount of the mortgage insurance will then be added to the mortgage payment every month.
This figure is used along with other factors to determine the risk a mortgage lender carries with the borrower. Risk of default is always at the forefront of any home loan lender's choice, and the LTV is a very important factor to be considered.
Lenders also set up their payment tiers by the LTV, and your credit score is a big factor in that determination. The differences in these attributes can increase or decrease your interest rates by as much as a full point, or as little as a quarter percent.
Simply said, the lower your loan-to-value ratio, the amount borrowed is less, the lender perceives you carrying lower risk, therefore lowering your interest rates, and you own more equity in the home. Having a great credit score, a solid borrowing history, and a good down payment for the loan will all be additional factors in the amount you will pre-qualify, or be pre-approved for.
The Loan-to-Value Ratio is also used during the calculation in the refinance of a property. Many mortgage lenders will offer a maximum rate of 75% the appraised value, or a 75% loan-to-value ratio for the amount of the new loan. If a borrower asks a lender for more than 75%, the lender will typically charge higher interest rates. Utilizing this information, you should feel confident in knowing what a loan-to-value ration is, how it's calculated, and how it affects your loan amounts, as well as interest rates.
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