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LTV Ratios In Detail

Defining LTV

Defining LTV

Orange County, CA – There are a lot of terms that loan officers deal with on a daily basis that are obvious to us, but clearly don’t make as much sense to our customers. In an effort to clarify one of these that causes some customers a little consternation, we’re going to explain today exactly what Loan-to-Value ratios are.

What Is LTV?

Your LTV is the initial value of your mortgage as a percentage of the appraised value of the home you’re trying to buy, or the actual price paid for said home, whichever is lower.

So, let’s say you have a $250,000 home, and you’re initial investment is $50,000 (and thus getting a $200,000 mortgage.) If your home appraises at:

  1. $250,000, then your LTV will be 80%.
  2. $300,000, then your LTV will be 80% (because you go by the amount you actually paid.)
  3. $200,000, then your LTV will be 100% (because you’ll go by the lower appraisal value.)

Of course, if you have more than one mortgage, the calculation changes. You determine your LTV for all mortgages at once. It’s called the combined loan-to-value or CLTV. If you have the same home from the above example and you get a $200,000 mortgage and a second mortgage of $25,000 (so that you only have to put $25,000 down), your LTV will be 80% and your CLTV will be 90%.

Refinancing and LTV’s

If you’re refinancing your home, you can establish your LTV ratio by adding up your current total loan balance and comparing that to your home’s appraised value. So, for example, let’s say you have a $250,000 home and you’ve cut your mortgage principal in half. You only have $100,000 left. But then you get a home equity line of credit for $50,000. So you have $150,000 in combined loan balances against your $250,000 home. Your LTV is 60%.

Pretty simple!

Why is This Important?

If you want to get a mortgage, there are LTV guidelines you must meet. Generally, for a refinance, you cannot have an LTV above 80% (85% in some areas). If you want to buy a home, the guidelines differ dramatically depending on your lender and who (if anyone) is insuring your mortgage. In addition, a lower LTV will help lower your interest rate.

The easiest way to reduce your LTV is to either increase your initial investment (if you’re buying a home) or pay off more of your current mortgage’s principal (if you’re refinancing.)

As always, contact us if you have any questions.

Scott Storace

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