LTV - Loan to Value

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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 $200,000 on a property valued at $400,000 is at an LTV of 50%. 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 .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 do not count, since they are not sales. 

In a refinance transaction, the ratio of loan amount to appraised value is taken into account in a similar way to determine loan approval. Especially when a borrower wants to obtain cash out in a transaction, the typical rule is a maximum of 90% of the appraised value for the total loan amount, including any cash out. 

Above 75% 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 .25% (1/4th of a point) higher than a 75% 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.

There are lenders who will go beyond the 90% cash out limitation, however the loan products and interest rates offered are generally .5% higher in rate. 

Rate and term refinances, or borrowing the current loan amount plus applicable closing costs, can go up to 95% and current rates.  Again, at 80.01% or greater LTV the new lender will demand mortgage insurance.

 

When combining a first and second mortgage in a refinance transaction, bear in mind that most lenders will require that the second loan be "seasoned" for a period of time, generally 12 months. If the second is not "seasoned" the lender will view the consolidation of the first and second mortgages as a cash out refinance loan, subject to the LTV guidelines and rate adjustments.

 

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 your loan specialist for detailed information on this loans.