Get to Know Your LTV

When shopping for a mortgage, it’s important to take note of your LTV, or loan-to-value.

If you haven’t heard this term before, it simply refers to your loan amount as a percentage of the property value.

So if you buy a home appraised at $100,000 and put down 20% ($20,000), the LTV would be 80% ($80,000 loan amount).

Loan amount / property value = Loan to Value (LTV)

If you only come in with a five percent down payment, the LTV would be 95% (zero down would be 100% LTV).

The latter example poses more risk to the bank or lender, as the homeowner is borrowing more while holding less equity (ownership) in the property.

For that reason, the LTV affects pricing and also program eligibility.

Typically, banks and lenders offer different pricing for certain loan-to-value ratios, such as 65-70%, 70-75%, 75-80%, and so forth.

The higher the LTV, the higher the risk, associated pricing adjustments, and mortgage rate you will ultimately receive.

So if you’re on the cusp of a certain LTV threshold (say 71%), it may make sense to bring a little more money to the table to qualify for the lower pricing tier between 65-70%.

That move alone could lower your interest rate significantly and save you hundreds each month.

Keep in mind that you may also be required to bring in more money to qualify for a specific loan program that caps the LTV at a certain percentage.

Most lenders also require that you pay for private mortgage insurance if the LTV exceeds 80%, so that’s another issue to consider when determining your desired down payment/loan amount.

Of course, your loan officer or mortgage broker should be able to help you decide what makes the most sense in terms of LTV and pricing/eligibility, so don’t fret.

(photo: thetruthabout)