LTV (Loan to Value) Explained

Just as with every industry, folks in the mortgage and general lending industry use really big words and fancy terminology that only they understand.  Whether they do this to make themselves feel smarter, us feel dumber, or a little bit of both, we as “laymen” need to educate ourselves as to what they’re talking about.  LTV is just one of the many acronyms used to calculate your mortgage rate and terms.

In a nutshell, LTV stands for Loan to Value.  It’s a percentage calculated by the amount your home us worth divided by the loan amount. If you have an $80,000 mortgage on a home that’s worth $100,000, you divide the 80 into 100 and end up with 80%- which equals an 80% loan to value.  Your lending institution of choice will have some great loan programs for you with an 80% LTV, as the available equity is at a good level.  This is why many folks in the mortgage industry refer to your LTV as the opposite of your equity, as it’s the amount that you as a homeowner can’t tap into. The LTV of any mortgage plus the available equity will always add up to 100%.

If a homeowner has more than one mortgage out on their home, either a home equity loan, a home equity line of credit, or second mortgage, the combination of all notes will be the LTV- in this case, the CLTV or combined loan to value. Again, this will effect the available mortgage rates on terms, especially when combined with a credit score.

When you apply for a mortgage, the LTV or CLTV will be a key factor in the mortgage program that you are interested in.  In order to qualify for the best possible loan program with a LTV higher than 80%, you will need to have a good credit score.  The higher your LTV, the higher your credit score needs to be to qualify for the better loan programs.

Another set back to a high loan to value is the possibility of PMI added to your monthly payment. PMI, or Private Mortgage Insurance, an added security for your mortgage investors in the event that you don’t pay your mortgage as you were supposed to, and the investors may not be able to recoup the original investment.  PMI guarantees they will not lose any money on your mortgage.

You may never be completely terminology savvy , but you’ll be a bit more prepared for mortgage shopping.  With a knowledgeable loan officer and a bit of homework on your part, you’ll be on your way to the best loan program you can get.

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