What is Loan to Value?
The term loan to value, or LTV, applies primarily to the mortgage banking industry. It is an equation that mortgage lenders use to assess their risk in lending a borrower money to purchase property. The equation is basically a ratio of the amount of money being borrowed to the value or purchase price of the property, whichever is less. To determine LTV of a new purchase, the purchase price or appraised value is divided by the down payment. As an example, if you were to purchase a home for $100,000 US Dollars (USD) and had $10,000 USD to apply as a down payment, the loan to value ratio would be 90%.
The purpose of establishing the loan to value ratio in the purchase of a home is to protect the lender from lending more money than the property is worth. This is why the appraised value must be at least equal to the purchase price. For consumers, the ratio weighs heavily on the interest rate you will receive on the payback of the loan. The lower the LTV, the lower the interest rate you will be given. Generally for every 5% increase in loan to value above 70%, the interest rate increases by 1/8 of a percent.
In addition, most lenders require private mortgage insurance premiums, or PMI, on ratios greater than 80%. The premium for private mortgage insurance will depend on the insurance company and the lender but can be as much as 1% of the loan amount.
Though the borrower will pay a higher interest rate on a 100% loan to value ratio, many lenders will offer this level of loan on a new purchase. However, a refinancing loan will generally not go to 100%. Lenders determine the ratio on a refinance by requiring an appraisal of the property. Usually, they can check the sale prices of comparable properties within 1 mile (1.6 km) to determine the value of the home, but in special circumstances, a walk-through appraisal may be necessary.
The loan to value ratio of a property also determines the amount a lender will give a borrower who wishes to obtain a home equity line of credit or a second mortgage. The difference between the value of the home and the amount owed on the primary mortgage is the maximum amount that can be borrowed.
There is an awesome real estate app I use called Realbench that calculates the loan-to-value ratio and gives you green or red signals, it also calculates tons of other real estate indicators. Just go to the Apple Store or Google Play and search for Realbench, in this time and age we don't have to calculate this stuff manually anymore.
I am doing a refinance on my home with a balance of $67,000, interest rate quoted at 4.875 percent. The appraisal came in low in my opinion at $119,000. My credit score came in at 819 according to the new lender, Charles Schwab Bank.
My question is this: the approximates that I was given initially was the above stated interest rate. Now, with this new lower appraisal, will this affect my interest rate? Should I be worried? If I am doing the math right, I think the LTV is 56.3 percent? Let me know if I need to be worried or what I can do. I feel that in my area, non transient, a 2,200 square foot home, four bedrooms, 2 1/2 bath on an acre should appraise for 10-15k more and that is what I told Schwab when they initially gave me the int rate of 4 7/8 percent. By the way, I am doing this to get out from an 8.5 percent rate. Thanks.
Bhutan-I know that the loan to value calculation is based on the value of the home and the down payment. I just wanted to add that if you do not have a standard down payment of 20%, then may be you should wait until you do in order to buy the home comfortably.
There are far too many foreclosures on the market and most of these homes had 100% financing. Now not only are most of these homes underwater, but the mortgage payments were too high for people to continue to pay. This is why they were foreclosed in the first place.
Putting a 20% down payment and avoiding private mortgage insurance is the way to go. You will also be offered a better interest rate and be able to pay down your mortgage faster. This will also improve your credit score.
SauteePan-I know that FHA loan to value are generally lower with some FHA loans offering 100% financing.
Usually FHA loans only require a 3% down payment and tend to have a lower private mortgage insurance payment.
Calculating loan to value is easy. You have to consider the value of the loan with the down payment. Although, FHA offers up to 100% financing, it is really better to have a standard down payment because the higher the down payment the lower the risk of you defaulting in a loan.
This is why loan to value mortgages below 80% have to have private mortgage insurance or PMI. After the 80% loan to value is satisfied, then PMI is no longer needed. This is the standard loan to value formula.
The ideal loan to value mortgages is 80% loan to value. This means that a borrower will put a 20% down payment and finance only 80% of the value of the home.
This is the preferred arrangement by most banks but they do provide loans outside these parameters. However, the interest rates are generally higher and private mortgage insurance or PMI is required.
Banks have a max loan to value, meaning that there is a maximum amount of money that the bank will loan out. Many banks will not offer 100% financing which would essentially be the full value of the home.
The most that I have been able to see is a 90 loan to value which requires a 10 percent down payment. The norm is really to offer 20% down payment which will give you the best opportunity to get a loan.
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