Homeownership is an important coming-of-age milestone that helps secure a bright future for the borrower and their family.
As the principal balance of the mortgage gets paid down, the borrower begins to accrue more equity. And equity is a very good thing to have. Aside from having a place to sleep and somewhere to stash possessions, equity is one of the most important benefits of owning a home.
The homeowner's Loan-to-Value (LTV) percentage is simple to understand indicator that gives a general indication of their equity accrual. It tells you how much of a property is being financed. In short, LTV is the relationship between your mortgage amount and the value of your property, expressed as a percentage of your property's value. As an example, if your home's value is $100,000 with an $80,000 mortgage, your LTV ratio is 80%. Consider the LTV as an at-a-glance personal reminder of the relationship between the remaining balance of the loan and the value of the home.
It’s often said that a down payment for a home should be around 20% of the total asking price. There are a few reasons for this. First, putting down that amount of money initially creates a small amount of equity in the purchase. More down upfront means less to pay off later, which is also a very good thing. And if the homeowner can get their LTV down to 80% or below then they may be able to avoid paying mortgage insurance.
A lower LTV instills confidence in the lender that the borrower is increasing, and will hopefully continue to increase the equity in their purchase.
Mortgage insurance is used to protect the lender in the event the borrower defaults on the loan. A lower LTV instills confidence in the lender that the borrower is increasing, and will hopefully continue to increase the equity in their purchase. It's not always necessary to put 20% down and there are often advertised deals that pop up where less is needed to grab the keys to a new home.
If the borrower signs for a mortgage with an LTV above 80%, they can drive the percentage down by paying back the loan, and once it falls below 80% they can request the lender cancel their mortgage insurance. The LTV is a living number. It will fluctuate, and it's in the borrower's best interest to keep driving that percentage lower, where it ultimately reaches zero once the mortgage is fully paid back.
And while external variables can affect the valuation of a house, it will mostly fall on the shoulders of the homeowner to control the direction of that ratio. If the borrower cash-out refinances or takes out a home equity loan they may end up causing an increase in their LTV.
If the home market is growing and inflates the value of the home, then this external variable would positively affect the homeowner's LTV ratio. For the homeowner to feel the effects of a shifting market, they would need to get their home reappraised before any official changes get made to their ratio. Since appraisals carry a cost of their own, it would be advantageous to stay aware of recent home sales in the surrounding area so as not to waste money on an appraisal when the market value hasn't shifted much.
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