When you are in the market for a new home, you need to be considering many factors that will lead up to the closing. Keep in mind that your mortgage lender is also doing the same. One of the most important things that your mortgage lender will be looking at, is the LTV (loan to value) ratio. Simply stated, the loan-to-value ratio is a lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage. You determine the LTV by dividing the price of your new home by the total loan amount. The resulting percentage is the value of your new home. Here are four reasons why the LTV is very crucial when making this deal.
Lower Mortgage Rates
As a general rule, prospective homeowners who have a low LTV ratio will usually receive a lower mortgage rate when compared to those who have a higher LTV ratio. Lenders usually ask that perspective homeowners pay a down payment of at least 20%. The higher the percentage of your down payment the lower your LTV ratio will be. It is important to note, however, that having a low LTV ratio will not guarantee you will receive a lower mortgage rate.
Lower Interest Rates When Refinancing
LTV ratios will also be important to you when you were trying to refinance your home. During this process, a low LTV ratio will garner low interest rates. It’s typical that those who are trying to refinance are trying to get in at the lowest interest rate as possible. If you do not have a low LTV ratio, the lender may consider you a high-risk borrower. It’s advisable that you get all your ducks in a row before trying to refinance so that you can get as low interest rate as is possible.
It Helps the Lender Perform a Risk Assessment
If you consider the LTV ratio from the lender’s perspective, this can be a highly useful tool to help perform a risk assessment. For example, if you are not able to make a down payment that is at least 20% of the total home value, you will need to take out a private mortgage insurance (PMI) so that the lender protects himself in case you default on the mortgage payments. If the lender knows what the LTV ratio is on the onset, he will be able to determine how much risk will be involved with interacting with you. A lender may choose not do business with a borrower if the LTV ratio is not favorable.
It Helps You Determine Your Down Payment
On a very practical note, the LTV ratio can help you determine how much of a down payment to make on your new home. The rule of thumb for down payments is usually 20% of the total home value. However, you may choose to increase this amount to get a low LTV ratio. Calculating the ratio using your initial down payment amount will help you determine if you should increase this amount.
When lenders are dealing with borrowers, the LTV ratio is very important in this transaction. Sometimes borrowers are advised to save up for a bigger down payment before attempting to buy new home since this will greatly affect LTV ratio.