What is LTV?
LTV (loan to value) is a term you'll encounter whether you're buying a new Georgia home or refinancing your current home, and it's simple to calculate.
To determine the LTV on a new home purchase, take the loan amount and divide it by the sales price of the property. For example, if you are obtaining a home loan in the amount of $75,000 and the sales price of the property is $100,000, the LTV is 75,000/100,000 = 75%. LTV can also be viewed as the opposite of the equity in a home. In the example above
To determine the LTV on a refinance, simply take your new loan amount and divide it by the appraised value of the property.
Loan to Value (LTV) refers to the percentage that results when the amount you owe on the loan is divided by the home's value. Thus, if your loan is for $80,000 on a $100,000 home, your loan to value would be 80,000 divided by 100,000 or 80%. That also means that you have 20% equity in your home, or $20,000 of equity value in this scenario. Another way to think about loan-to-value is the opposite of equity. Equity is determined by subtracting the amount owed from the value of the home and would also register as a percentage when the difference is divided by the value of the home. You will find that the percentage LTV and the percentage of equity will always add up to 100%.
Loan-to-Value (LTV) Summary
Cumulative Loan to Value or CLTV (sometimes referred to as "combined loan to value") refers the total amount owed, not just your first mortgage. It comes into play most often when two loans must be taken into consideration. For instance, if you are securing a first mortgage for 80% of the home's value and a second mortgage for 15% of the home's value, the LTV of the first is 80% and the LTV for the second is 15%, but the CLTV is 95% as the sum of both loans is equal to 95% of the home's value. In this scenario, your equity is 5% of the home's value.
When you apply for a loan, whether it be a for a purchase or a refinance loan, LTV and CLTV will be taken into account and will be used to determine several things depending on the mortgage program you're using. For most programs, you'll need a certain minimum credit score to qualify for higher loan-to-value.
Loan to Value and CLTV are important because lenders view this as one of the key risk factors in determining whether to lend to a borrower. If a borrower defaults and the property goes to foreclosure the lender may incur a loss if the LTV/CLTV are relatively too high. However, if the LTV/CLTV are relatively low the lender is at a lower risk of taking a loss, which makes it more attractive to lend to the borrower. Generally speaking, a LTV/CLTV above 80% is considered risky. In this case the lender may determine that the borrower needs to purchase private mortgage insurance (PMI). This insurance policy is designed to protect lenders or investors in the event of a loss due to a default or a foreclosure of the property.
Loan to Value (LTV) Tips
As a rule of thumb you should try to keep the loan to value of your home mortgage below 80%. In the event that you need to sell or refinance the home you will typically be in a favorable position. When purchasing a home it helps to have a substantial down payment, which will lower your LTV. By doing so you may be able to qualify for better mortgage interest rates and terms. In the case of considering a refinance, having plenty of equity in the home does not necessarily mean you should tap into it. You must remember that if you want to refinance the mortgage to take "cash-out" you will be paying interest on the "cash" taken out over the life of the loan. You should take into consideration the reasons why you want to take "cash-out" and how it will benefit you in the short and long run. For instance, remodeling a home usually means an increase in property value which tends to be favorable in both the short and long term. Paying off high interest debt tends to also be beneficial to a borrower. However, if high interest debt is being paid off through a new mortgage it is important that you not start the cycle over by accumulating new unsecured debt.
Peachtree Mortgage Services, Inc. - 5305 Claridge Square - Dunwoody, GA 30338
Office Phone: 770.698.9394 Fax: 770.395.1715
We provide mortgages throughout metro Atlanta and the entire state of Georgia.
GEORGIA RESIDENTIAL MORTGAGE LICENSEE #7359
Nationwide Mortgage Licensing System & Registry (NMLS) #133589