What is Loan to value ratio for refinancing?

Loan to value ratio for refinancing

A loan to value ratio determines the value of the mortgage versus the value of the property. The loan to value ratio, (LTV) is used for numerous loan options, including auto, home loans, and refinancing.

The more money a lender gives out, the higher the LTV ratio. A higher LTV suggests there is more risk for the lender due to a higher chance of default. A higher risk usually means it may be harder to get approved, an increased interest rate, and additional costs such as mortgage insurance.

LTV’s are part of a bigger picture that includes your credit score and your monthly income. One of the primary items lenders tend to look at is your debt to income ratio, meaning your debt repayment is divided by your income. It’s the quickest way to determine whether you can afford extra monthly payments or if you are going to be over extended.

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How to calculate Loan-to-Value Ratio?

To calculate your loan to value ratio for refinancing, you divide the amount borrowed by the appraised property value or purchase price, whichever is less. Multiply your answer by 100, and you’ll have your result expressed by a percentage. This metric is the key to financial assessment. The LTV ratio essentially shows how much of an asset is being financed by a lending institution.

Determining the LTV value is a critical component of mortgage underwriting. The higher the loan value compared to the asset value, the stricter the lending criteria. Should the borrower default, they want to ensure that the lender has a cushion to recover the loan.

Loan to Value Formula

LTV=Loan Amount / Price of Asset

For example, assume you’d like to buy a home appraised at $100,000 and you have a $10,000 down payment, you’ll need to borrow $90,000. This results in an LTV ratio of 90%.
While the LTV ratio is a determining factor to secure a mortgage, it also plays a substantial role in your interest rate. The higher the loan to value, the higher the rate and the mortgage insurance, if you are over 80% LTV.

Refinancing loan to value ratio

Deepening your knowledge of your LTV ratio helps you understand how much you own from a financial standpoint. A basic rule of thumb is that your LTV should be 80% or lower to contemplate refinancing. This means you have at least 20% equity in your home, but there are other options to refinance if you don’t have that equity.

A lower ratio means you have more equity and are one step closer to owning your home outright. Generally, you’ll have to get private mortgage insurance (PMI) to protect the lender when your LTV ratio is higher than 80%. This protection allows the lender to cover any outstanding balance in the event of foreclosure when your home equity isn’t sufficient.
Meanwhile, your LTV ratio requirements may be more lenient when you refinance into a VA, FHA or USDA loan.

The key to refinancing your home is your loan-to-value ratio; it’s one of the most crucial metrics your lender will use to finalize your approval—the lower your LTV ratio, the better.

What’s 80% LTV?

A good loan-to-value is contingent on the type of mortgage or refinance loan you’re applying for. An ideal LTV for a home loan is typically 80% or less, which means you’ve borrowed 80% of your property’s appraised value.

From a lender’s perspective, an 80% loan is optimal and minimizes their risks of losing money. So, if you have 20% for a down payment, that will lower your monthly payment but there are plenty of mortgage programs that allow for less than 20% down.

If you want more information about loan to value’s or how to buy a house, please reach out to Cain Mortgage Team today!

 

 

Sources

Laura Grace Tarpley (Dec 3, 2020) Loan-To-Value Ratio: What Is It, and How Does It Affect Refinancing
https://www.businessinsider.com/personal-finance/loan-to-value-ratio-mortgage-refinancing

Dan Green (July 10, 2020)
Loan-To-Value (LTV) For Mortgages: Explained In Plain English
https://www.bankrate.com/mortgages/cash-out-refinancing/

Learn finance, accounting and business (n.d.).Loan to Value Ratio (LTV) – Study Finance
https://studyfinance.com/loan-to-value-ratio/