Loan To Value Ratio & Private Mortgage Insurance
This article explains what the loan-to-value ratio is, and how it can impact your ability to get a mortgage. It is a key measure used in mortgage lending to determine how much of a property’s appraised value a lender will extend credit for.
The loan-to-value ratio measures the relationship between the amount of an equity loan or line of credit taken out against the appraised value of a property, and it allows lenders to determine how much equity they are willing to pull from the borrower’s home. When taking out an equity loan or line of credit, borrowers typically need to put down some kind of payment; this can be done using cash, home equity, or other amounts.
The Loan to Value (LTV) is the loan amount to the value of the property. The higher this ratio, the higher the mortgage interest rate will be. This is due to the fact that when a borrower has a higher LTV, they are perceived as a greater risk for defaulting on their loan and lenders want to offset this risk by charging a higher rate. In some cases, such as when an LTV is above 80%, lenders may require borrowers to pay for private mortgage insurance (PMI).
Private Mortgage Insurance (PMI)
PMI is designed to mitigate risk for lenders and protect them from potential losses in case of default. It’s important to note that unlike homeowners insurance, which protects you in case of damage or theft, PMI does not directly benefit you as a borrower; instead it serves as an additional cost that must be paid in order for your lender to feel comfortable offering you a loan.
Lenders require private mortgage insurance when a borrower is seeking a loan-to-value (LTV) ratio greater than 80%, meaning the value of the property being purchased is more than 80% of the value of the loan being requested. In cases where the LTV ratio is higher, lenders will offer higher interest rates to offset their risk and in some cases, may not approve an application at all.
A LTV ratio is calculated by dividing the amount of money requested for a mortgage loan by the estimated or appraised value of the property being purchased. For additional information or help with your real estate, contact us now.