The loan-to-value ratio is an important factor lenders take into consideration when borrowers apply for a home mortgage loan. LTV ratios help lenders determine how much to lend to a borrower so they do not lend more money than the value of the property.
The loan-to-value ratio can be easily obtained by dividing the price of the property by the total loan amount. For instance, if the purchase price of the house is $150,000, with a down payment of $30,000, the loan amount would be $120,000 making LTV ratio of 80 percent. This means that the loan amount is 80 percent of the value of the house.
LTV ratios play a vital role in getting a lower mortgage rate. Borrowers with low loan-to-value ratios are more likely to get a lower mortgage rate compared to borrowers with higher loan-to-value ratios. Most lenders require borrowers to put a down payment of 20% for conventional mortgage loans to avoid payment of private mortgage insurance (PMI). PMI is added to borrowers’ monthly mortgage payments and protects lenders in case a borrower defaults in his/her mortgage payments.
Loan-to-value ratios of 80 percent and below are considered low LTVs and are less risky for lenders. Borrowers with low LTVs have a higher chance of getting a lower mortgage rate. However, if the loan-to-value ratio is higher than 80 percent, lenders consider those borrowers as higher risks and give them higher mortgage rates.
The loan-to-value is important in both purchasing and refinancing to get low interest rates. A higher down payment will result in a lower LTV, therefore it is advisable for borrowers to save for their down payments.
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