Mortgage Loan-to-Value Explained

Have you ever visited a country where you don’t speak the language? Getting a mortgage can feel a lot like that. ARM, PMI, amortization, loan-to-value—if you’re not familiar with the industry, this jargon can sound like an unknown foreign language and make you feel a little lost. But if you’re thinking of buying a home, understanding the basics of loan-to-value (LTV) can really help! Take a look at some of our pointers.

 

What is a Mortgage Loan-to-Value?

Simply put, a mortgage LTV ratio compares the size of the loan to the value of the home. It’s a number that lenders use to help them determine just how much risk is going to be associated with the loan amount and the current market value of the home. It is also used to determine exactly how much needs to be put down for a down payment.

 

When you apply for a mortgage, your lender is going to calculate your LTV to determine your loan’s level of risk. Looking for ways to be extra prepared and get ahead of the game? This is something that you can calculate yourself. This is done by dividing the amount of your mortgage by the appraised value of the property.

 

Let’s take a look at an example: If you pay $40,000 down and take out a $260,000 mortgage for a home that appraised at $300,000, you would divide $260,000 by $300,000. This tells you that your LTV would be 86%. This means your mortgage is 86% of the value of your home.

 

According to thebalance.com, “A higher LTV ratio suggests more risk because the assets behind the loan are less likely to pay off the loan as the LTV ratio increases.” This means that if you foreclose with a high LTV, the lender may have a difficult time recuperating the outstanding mortgage balance when you decide to resell the house.

 

Typically, anything above 80% is considered to be a high LTV. If you find yourself with an LTV above 100%, the market value of the property is less than what is currently owed on the loan. Keeping your LTV around or under 80% is going to be the best route!

 

Since loans with high LTV ratios are considered to be riskier for lenders, they will often charge higher interest rates and add mortgage insurance to the loan. Often, this can also lead to borrowers with a good credit score taking a hit.

 

Benefits of lowering your LTV

There are a number of benefits with putting in the effort to lower your LTV. Not only will it lower the overall cost over the life of the loan, but it can provide a tremendous amount of peace of mind. Here are some other benefits:

 

1. Get approved for a loan more easily.
2. Lock in a lower interest rate, saving money over the life of the loan.
3. Avoid paying mortgage insurance (usually if your LTV is 80% or lower).
4. Lower the risk of being stuck with an “underwater” loan if your home’s value drops and you owe more than it is worth.
5. It helps first-time home buyers to be less vulnerable and more financially stable.
6. Opens up the number of loan options you have.

 

How to lower your LTV

We’ve covered how beneficial it is to lower your LTV - from reduced overall costs to locking in great interest rates. It is definitely something that is worth your time and energy if you are in the process of purchasing or refinancing your home. To lower your LTV, you need to decrease the amount you owe or you need to increase your home's value. There is a number of ways you might consider doing this:

 

1. Paying more money down in the beginning;
2. Building equity over time as you pay off your mortgage;
3. Proving (through an appraisal) that your home’s value has risen.

 

Tip: Once you have paid enough toward your loan for your LTV to hit 80%, you can often cancel your mortgage insurance. While mortgage insurance might seem like a good thing to have, it’s wise to avoid it when possible. Not only is it costly and long-winded, but it can be difficult to cancel. However, if you’ve lowered your LTV to a reasonable percentage, you’re in a good spot to get it out of the way.

 

Afraid you won’t be able to afford to pay 20% down? Don’t sweat it! There are still plenty of options available to you. An FHA loan only requires 3.5% down, and Mountain America has a first-time homebuyer loan with as little as $1,000 down and 100% loan-to-value financing on approved credit. Contact a mortgage expert for guidance or apply online in a snap. Don’t let yourself get too overwhelmed- there are still plenty of ways that you can get everything taken care of!

 

Want to know how much home you can afford? Click here for our handy mortgage qualification calculator.