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The ABCs of LTV and Your Mortgage Loan
by Karen Lawson
CMR Columnist
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The amount of your home mortgage, divided by the value of your home, is considered the "loan to value," or LTV calculation that lenders use in determining loan type and credit risk. This calculation is also used to determine if your monthly mortgage payments must include prorated amounts for PMI (private mortgage insurance), property taxes, and hazard insurance. A conventional 30-year mortgage loan generally requires an LTV of 80% or less. So why does LTV matter when you're shopping for a home and a home mortgage?
LTV and Budgeting for the Big Picture
The larger your down payment, the lower the LTV ratio will be. For example, if you buy a home for its appraised value of $300,000 and make a 20% down payment of $60,000, your mortgage loan amount would be $240,000, with an 80% LTV. This means that your loan will probably not include extra amounts for payment of PMI, property taxes, and hazard insurance. You'll still need to budget for paying these expenses when they are due. (Note: This example does not include closing costs or other charges associated with buying a home.)
Alphabet Soup: LTV and PMI
You really want that $300,000 house, but you can't come up with $60,000, or 20% down. You're not alone. Skyrocketing home prices mean that more buyers are opting for loans requiring lower down payments. The good news is that mortgage lenders offer a wide variety of home loan options. You will need to consider the additional cost of PMI, which will be included in your monthly mortgage payments if your LTV is higher than 80%.
Looking (and Planning) Ahead for Your Home and Mortgage
PMI coverage protects your lender in the event you default on your mortgage loan. Loans with LTV ratios higher than 80% are considered a greater credit risk and generally require PMI. As your home's value increases, the LTV decreases. Knowing the current value of your home is useful for financial planning.
About the Author
Karen Lawson is a freelance writer with more than 15 years of experience in mortgage lending. She has an MA degree in English.
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