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Mortgaging in Barrie? Loan-to-Value Ratio Explained.
April 10, 2018 | Posted by: Della Dwyer - Your Trusted Barrie and Surrounding areas Mortgage Broker
The world of finance is often filled with complex and arcane terms, from points on the refinancing of your home mortgage to the annual percentage rate you earn on your savings account or certificate of deposit. At some point it can seem like this complexity is intentional - a way to keep ordinary consumers out of the loop and dependent on financial professionals.
No matter what the reasons behind the confusion, it is important to educate yourself and learn as much as you can about these seemingly difficult terms and what they really mean. When you break it all down, you may be surprised how easy to understand these once complex terms really are.
Take the loan-to-value ratio for instance. If you are applying for a loan or refinancing your mortgage, you will probably hear a lot about the loan-to-value ratio, or LTV. Many lenders treat the loan-to-value ratio like a mysterious thing, but it is actually quite simple to understand.
The loan-to-value ratio is simply the ratio between the loan and the value of the asset being purchased. Once you see a couple of examples of the loan-to-value ratio in action and how it is used in the real world, you will quickly see that the term is not as difficult or mysterious as it first appeared to be.
Let's say, for instance, you are buying a home that is appraised at $100,000. You have $20,000 to put down, meaning you will need to take out an $80,000 mortgage to close the sale. In that case, your loan-to-value ratio would be the $100,000 appraised value of the home divided by the $80,000 value of the mortgage. Expressed in percentage terms, the LTV in this example is 80%.
In another example the borrower may be seeking a higher mortgage and incurring a steeper loan-to-value ratio as a result. Let's look at a home with an appraised value of that same $100,000, but in this case the buyer would need to borrow $92,000 to make the purchase. In that case the loan-to-value ratio would be 92%, which is above the bar where most lenders would feel comfortable.
In the second example the borrower may have a difficult time qualifying for the loan he or she needs. The loan-to-value ratio plays a big role in lending decisions, even though it is not the only factor used to determine creditworthiness. Lenders also use a number of other factors, including the income of the borrower, their credit score and their history with other loans and payments.
As you can see, the loan-to-value ratio is not as difficult a subject as it may seem. Once you understand what the LTV means and why lenders find it important, it will be easier to get the loan you need and protect your financial future.
Still have more questions? Work with a Barrie & Orillia Mortgage Professional you can trust, Della Dwyer. Contact us today, We work for you, not the banks!
