So you are like many people, you want to live the American dream and buy your new dream home but you keep hearing people talking about this thing called an LTV and you are not sure what it is or why is it so important. That is fair enough so let’s take a look and see what it is and why it is important. Now a lot of times when a person is looking to buy a home they are looking at borrow money to buy their new home. Usually in most cases before a home is bought there will be an appraisal done. The appraisal will give a value to the home.
When a person is looking to buy or even refinance their mortgage the loan to value ratio is just what it sounds like, how much are you looking to borrow as opposed to the value of the home. Now that is very important for a couple of different reasons. First and foremost it protects both the lender and the borrower.
You don’t want people taking out loans that will not be met by the value of the home. For example let’s say I am looking to do a loan for $150,000 but my mortgage is worth $300,000 then my loan to value ratio would be 50%. However let’s say the value of my home was only $125,000 then the lender could not do the loan for $150,000 because it is more than the value of my home and that would be a bad loan.
Now the other reason the loan to value ratio (LTV) is so important is because it can affect a person’s interest rate on the loan. Lower LTV’s will usually get a lower interest rate, people with higher LTV’s will get higher interest rates.