What
is "Loan to Value" or LTV?
Loan to
value, or LTV as it is commonly referred to, is the ratio of Loan
Amount to the Value of a property. For example, a loan of $300,000
on a property valued at $400,000 is at an LTV of 75%. LTV considerations
become important in several situations.
Purchase
loans
The value portion of the
Loan to Value equation is determined by the lower of the purchase
price or appraised value when you are buying a home. The most
conservative valuation is used. This prevents lending
more that the property is worth (bad risk for the lender), or lending
more than you were willing to purchase the the property for (essentially
giving you cash to buy the property).
Also to consider,
is that when a property is purchased, the down payment is critical
to the lending decision. When the down payment is less than 20%, i.e.
the LTV is greater than 80%, a lender will generally require mortgage
insurance. Mortgage Insurance coverage, or PMI, is a premium or fee
which is included in the monthly mortgage payment. It can range from
0.22% to almost 1% of the loan amount annually, with the exact coverage
determined by the loan type, insurance company, and LTV. Mortgage
insurance payments are not tax deductible.
An alternative
to obtaining PMI is to structure the purchase transaction to include
a first and second mortgage, thus bypassing the need to have the additional
mortgage insurance premium.
Refinance
When refinancing, the appraised
value is used for the value portion of the Loan to Value equation.
Appraised values are based off sales of comparable homes, generally
within 1 mile of the subject property, within 1 year. Listing
usually do not count, since they are not sales.
Above 70% LTV, there is generally a .125% (1/8th of a point) increase
in the mortgage rate for every 5% in LTV. For example, an 85%
cash out mortgage is generally 0.375% (3/8th of a point) higher than
a 70% cash out mortgage at prevailing rates. This is a small adjustment
based on risk models and past history of borrowers. The reasoning
is that if you are taking cash out of a property, you have less of
a vested interest in keeping that property. Of course each lender
has their own guidelines, so use the above numbers with a grain of
salt.
Overall,
the lower the ratio of the loan amount to the value appraised (or
purchase price), the more favorably a lender views the risk of the
loan. Loan to value considerations also will differ in owner occupant
versus rental or non-owner situations. Contact Allie
Mae or your loan broker for further information.
