This is one of those abbreviations you will undoubtedly hear and read about while you are shopping for your home loan. LTV simply means “Loan to Value”. This is a ratio that is derived by the amount of the loan compared to the total value of the home. In other words, if you are buying a home for $100,000, and are getting a $97,000, your LTV is going to be 97.
Now that we know what it means, how does it affect your mortgage?
What is the ideal Loan to Value Ratio
If you have been researching or talking with loan officers at all at this point, it has probably been brought up to you that you should put 20% down. By the way, with your new fancy lingo, that would be an 80% LTV. The reason for this is that typically putting 20% down will allow you to avoid PMI. This can significantly reduce the overall cost of the mortgage and thus, has created the standard for the amount that a buyer should put down on a home.
However, many lenders have come up with programs that allow buyers to put down far less and still avoid the dreaded PMI. Some of these involve taking out one mortgage for an 80% LTV, while immediately taking out a second mortgage for the rest of the amount that is needed. The second loan may incur a slightly higher interest rate, but it is still cheaper than the cost of PMI and can be paid off at any time. This option provides a lot of flexibility to the buyer over time. There are also programs where lenders have come up with creative ways to avoid PMI costs for the buyer, but do your homework before signing onto one of these programs. Many times they have just hidden the costs somewhere else.
If you do get stuck putting less than 20% down and have to pay PMI it really isn’t the end of the world. There is always the option to overpay your loans for several years or make extra payments to try and quickly pay off 20% of the principal balance on your loan. Once you do this, you should be able to have the PMI removed or refinance your mortgage depending on current rates.
Will the LTV Change the Mortgage Rate?
The easy answer is that, yes, it more than likely will affect the mortgage rate you receive. However, there are a variety of factors that can change the rate including the term of the loan, your credit score, the mortgage type, your income, and more. The LTV probably won’t have as much impact as those other factors.
At the end of the day it is important that you do what is right for you and your financial situation. If you are young and need a larger house for a growing family then it may be okay to put less down if you have plans on how to pay it off quickly. If you are in a position to wait a few years to save, or you can opt for a cheaper home then that may be a better option for your financial future.