If you are in the process of mortgage refinancing, one important part of your application approval and the interest rate you receive is the Loan-to-Value ratio or LTV. Here are the basics of Loan-to-Value ratio and what you need to know to qualify for the best mortgage loan.
What is the Loan to Value Ratio?
Your Loan to Value Ratio is calculated by dividing the balance of your outstanding mortgage by the appraised value of your home. The more equity you have in your home when refinancing, the lower your LTV ratio will be. The lower your LTV the better your mortgage interest rate will be, saving your money with a lower mortgage payment.
Problems with High LTV Ratios
If your Loan to Value Ratio is high, you can expect to pay more for your mortgage loan. Having a high Loan to Value ratio means you are more of a risk for the lender. Lenders pass this additional risk on to you in the form of higher interest rates and lender fees. If your Loan to Value ratio is greater than 80%, the lender could require you to purchase Private Mortgage Insurance as a condition of approval.
Private Mortgage Insurance (PMI) is expensive and does nothing for you but drive up your cost. PMI only protects the lender from losses due to foreclosure on your home. This costly insurance could drive your monthly payments up several hundred dollars and negate any benefit you might receive from mortgage refinancing.
You can learn more about your mortgage refinancing options and how to avoid costly homeowner mistakes by registering for a free mortgage guidebook.
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