Home Loans and the Loan-to-Value Ratio
When you’re comparing loan rates to find the right mortgage for your needs, whether you’re purchasing or refinancing your home, you’ll notice references to the loan-to-value ratio - especially in the fine print.
It’s an important ratio to understand because it will determine whether you’re approved for the loan you need as well as the qualified interest rate.
What is the loan-to-value ratio?
Very simply, the loan-to-value ratio compares how much you are borrowing against the value of the home.
For most lenders, the best rates are available when your loan-to-value ratio is 80% or lower (you’re borrowing no more than 80% of the value of the home).
This is because the loan-to-value ratio tells lenders how much risk they are taking on with the loan; the lower the risk, the better the interest rate.
How high of an LTV ratio can be approved?
It depends on the type of loan and the lender. Some lenders may approve conventional loans with a loan-to-value ratio of up to 97%, but you’ll likely pay a higher interest rate.
You’ll probably also have to pay an additional amount each month in Private Mortgage Insurance (PMI) charges. PMI protects the lender in the event you stop making your payments on the loan.
The importance of a down payment
The question of the loan-to-value ratio shows why it is so important to save for a down payment before you look to buy a home.
The larger the down payment you have, the lower your loan-to-value ratio will be. If you have a down payment large enough that your loan-to-value ratio is 80% or lower, you’ll not only qualify for better rates, you’ll also avoid having to pay PMI.
What if I don’t have a 20% down payment?
You may have another option to get to the 80% loan-to-value ratio, depending on the value of the home you want to buy.
Some lenders, including SF Fire Credit Union, will allow you to use a second loan, such as a Home Equity Line of Credit, to reduce your down payment on the home.
We’re here to help
After considering these points, you may still have questions about your particular situation. Our Real Estate Loan Officers are here to help you answer questions about your home loan options.