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Loan To Value (LTV)
A loan to value (LTV) refers to the amount of loan required to finance a property compared to the value of it.
It is usually expressed as a percentage or ratio of appraised value.
For example 80% of $150,000.
By using a percentage against property value, lenders can ensure that a loan quantum for financing real estate will never exceed the actual value of it.
While it’s not impossible to obtain 100% financing in the market today, especially with creative financing, big lenders seldom approves loan-to-value at 100%.
The most common number is 80%.
When a mortgage is approved at 80% LTV, it also means that the remaining 20% has to be paid with down payment.
LTV can affect the requirements for private mortgage insurance.
In some instances, a high credit score can convince a lender to approve an LTV higher than what they typically grant a borrower.
However in general, the higher the LTV, the higher the interest rates as it is perceived by lenders as additional risks.
The logic is that the more money a home buyer has put down for his house, the less likely he is to be delinquent or even default.
Maximum LTV is the most common expression of LTV that we are used to.
It basically describes the loan amount against home value in the typical mortgage.
While the LTV basically describes a loan size in relation to property value, there are various ways to reference it depending on the situation and types of financing deals being discussed.
Another manner where we might come across it is the maximum combined loan to value (CLTV)
The CLTV refers to the maximum ratio of loan to value for a combination of first and second mortgage.
LTV in refinancing
Loan to value don’t just play a critical role in the purchase of real estate, it also makes it’s presence felt in refinancing, especially when there is a cash-out involved.
For example, if a house has appreciated in value and the owner wants to with draw the equity by triggering an open end mortgage or with a home equity loan, LTV will be applied on the new appraised value and a new loan amount can be calculated.
This is the same with HELOC.
In some cases, low LTV limits can prevent a home owner from refinancing as the current outstanding loan is higher than the amount with the lower LTV in place. So the only way a borrower can refinance in this instance is to prepay an amount that would reduce the loan balance to what the LTV indicates.