What is LTV? What LTV means? Why is LTV important when you apply for a mortgage?
Loan-to-Value (LTV), It’s the amount of the mortgage compared with the value of the property.
It is important because it is one of the factors in determining eligibility for securing a mortgage, a home equity loan, or a line of credit. However, it can play a substantial role in the interest rate that a borrower is able to secure.
Lower LTV means the better interest rate
Most lenders offer mortgage and home equity applicants the lowest possible interest rate when their LTV ratio is at or below 80%. Loan assessments with high LTV ratios are considered higher-risk loans. Therefore, if the mortgage is approved, the loan has a higher interest rate.
How to calculate LTV?
Loan-to-Value (LTV) is expressed as a percentage and is calculated by dividing the loan amount by the appraised value of the property.
LTV = Loan Amount ÷ Appraised Property Value * 100
where:
Loan Amount is the amount of money borrowed for the purchase of the property.
Appraised Property Value is the estimated market value of the property, as determined by a professional appraiser.
For example, if a borrower wants to purchase a property for $100,000 and takes out a loan for $80,000, the LTV would be calculated as follows:
LTV = $80,000 ÷ $100,000 * 100 = 80%
So, in this example, the LTV is 80%, which means that the loan represents 80% of the property value and the borrower would have to provide a 20% down payment.
LTV > 80%, private mortgage insurance (PMI) is required
Private Mortgage Insurance (PMI) is a type of insurance that protects the lender in the event that a borrower defaults on their mortgage.
PMI is typically required for borrowers who have a loan-to-value (LTV) ratio of more than 80%, meaning that their downpayment is lower than 20% of the property’s value.
Private Mortgage Insurance (PMI) is added to the monthly mortgage payment and can add several hundred dollars to the cost of homeownership each year.
Borrowers who are required to purchase PMI may be able to cancel the insurance once their LTV ratio reaches 78% or 80%, depending on the terms of their loan and the value of their property.
Private Mortgage Insurance (PMI) is not homeowner’s insurance,
Do not confuse Private Mortgage Insurance (PMI) with homeowner’s insurance, which protects the borrower’s investment in the property and provides coverage in the event of damage or loss.
Borrowers are typically required to maintain homeowner’s insurance as a condition of their mortgage, regardless of whether or not they are required to purchase Private Mortgage Insurance (PMI).
Remember, before shopping for a house, get a pre-approval letter first. For more information, contact me.
