Buying an asset is a tough decision particularly with the rapid increase in the price of properties. This is the reason because of which, you would not see a lot of people making payments out of their own pockets to buy a home. Most people opt for mortgages and financial assistance options. In this way, they do not have to save a large financial chunk and then pay it. If you are aiming at getting a loan to buy a piece of property, make sure that you know about LTV (Loan to Value) ratio and the factors taken into account when this ratio is being calculated. Let us go through some more details to gain more understanding.
LTV (Loan to Value) and its calculation
To start with, lets us go through the definition of LTV. When a financial organization gets loan applications, it does not approve or reject them immediately. Financial organizations and loan giving firms execute complex financial procedures to check the chances of application approval. In simple terms, LTV defines the risk percentage of lending the amount of money. On a maximum scale, the LTV ratio should be 80 per cent. Financial companies mostly do not approve loan requests that have an LTV of more than 80 per cent.
Even if you are not a financial expert, it is important to know how the LTV value is determined. With so many scams and illegitimate monetary activities taking place, knowing about the LTV formula is important. This would help you in understanding how the mortgage payment is being determined. Given below is the formula used to determine LTV
LTV = Mortgage Payment / Appraised Value
- When you talk about the formula of calculating LTV, you need to understand the terms that are being used. In the above formula, you can view three terms namely LTV (Loan to Value), Mortgage Payment and Appraised Property Value. Loan to Value is the ratio of the Mortgage payment and Appraised Property Value. The LTV is calculated in percentage.
- Mortgage Payment is the amount that has been borrowed from the financial company. For instance, consider that the Appeased Value is $120,000 and the down payment being made is $40,000. This simply means that the Mortgage Payment is $80,000. Hence, when you plug the values in the formula of LTV, the following value would be determined.
LTV = (80,000/120,000)*100
LTV = 67%
From the above example, we can get a clear feel of how LTV is calculated. The key factors involved to calculate LTV include the Mortgage Payment and Appeased Value.
Steps of using the LTV calculator
The usage process of the LTV calculator is very simple. By following few simple steps, you can determine the LTV ratio. Here are the steps which you have to perform for this purpose.
- When you open the link, you would be required to provide the appraised value of the property. This value would obviously vary and depend on what you are purchasing. In this scenario, we can consider that the property appeased value is $100,000. After that you can move on to the next step.
- After that, in the second step, you have two options to select from. Either you can select the deposit sum, loan amount or LTV. For instance, if you have selected “deposit sum”, you would see another text box on your screen titled “deposit amount”. Simply enter the deposit money amount. If you are submitting $50,000 as the deposit sum, the tool would determine the LTV value accordingly. As it is mentioned above, the LTV value depends on various parameters including the deposit payment and appraised value.
- Using a dependable LTV calculator is the key if you want to get the correct figures. It is a difficult option to select the correct option because several alternatives are available on the internet. Calculators,tech offers one of the best LTV calculators. The best thing is that you can add it as a widget to your website. The moment you want to use it, you can do it without typing a complete web address.
What does high and low Loan to value mean?
If you are interested in getting the right loan deals to buy a house, simply knowing the basic definition of LTV is not enough. It is important to know about the impact of LTV ratio. Does a high LTV value help you getting the correct deals? Do you need to emphasize on reducing the LTV value? The LTV value would obviously depend on the mortgage payment made and the appraised value of the property. These two constituents are used in the formula to determine the LTV value.
Let us go into further depth of high and low LTV
High LTV and its effects
To determine the effects of high LTV, you need to understand how the intensity of LTV is determined. The mortgage payment defines the sum that you are as loan. The greater the mortgage payment, the higher would be the LTV ratio. If the LTV ratio is high, it simply means that you have submitted a small percentage as down payment.
1. Higher LTV means missing out on the best deals
There is no doubt that financial loan grant companies prefer customers who pay a large percentage as down payment. When the down payment amount is high, it would be hard to get the best deals on the table. Loan giving companies review the application thoroughly before the loan amount is disbursed. People who have 75 to 80 per cent LTV get the least attractive deals. Hence, it is always encouraged to pay a higher percentage as down payment so that you can get your hands on the best offers.
2. High LTV means greater interest and increased monthly instalment
A lot of people adopt a very hasty approach when they are considering LTV options. It is important to be careful in this relation. Simply submitting a small deposit percentage may get you a high mortgage sum but you should analyse the long term damages as well. A high LTV ratio simply means that you would have to pay a higher sum as instalment. This would cause increased burden for a long span of time. It is advisable to increase the down payment and opt for a property with lower appraised value (sale price). In this way, the LTV ratio would go down and a reduced sum of money would be paid as monthly instalment. This is the best option in the long run.
People with low LTV value are always in a more advantageous position that ones who have a high LTV value. Having a low LTV value means that a large sum has been submitted as down payment. Along with that, this means that the mortgage amount is low and you have taken a smaller sum as loan.
- When you submit a request for mortgage payment, various factors are taken into account before the application is accepted or rejected. One of them is the down payment made. People who submit higher percentages of appraised value as down payment have greater chances of applications being approved. Other than, loan giving companies provide them with the best deals.
- The chances of a mortgage application being accepted decrease when the LTV ratio increases. Loan giving companies give priority to customers who submit a greater percentage of the appraised value as down payment. Thus, as a customer, you should make sure that you are submitting the highest possible percentage as down payment. In other words, your aim should be to reduce the LTV value.
- A low LTV value creates a positive impression in the front of the loan giving company. People who are financially sound submit a high percentage of appraised value as down payment. Banks and loan giving institutions trust them more as they have a more reliable profile.
What does Loan to Value ratio mean for your mortgage?
Loan to Value (LTV) ratio in simple terms defines the percentage of property cost that has been taken as loan. In other words, it identifies the ratio that is financial liability. To get more understanding on this, let us glance at the formula of LTV already mentioned above.
LTV = Mortgage Payment / Appraised Value
Less Down payment increases LTV
If you are purchasing a property and you want financial assistance for it, get a complete understanding of this formula. Mortgage payment is the difference between appraised value and down payment. In other words, it highlights the amount taken as loan. The higher the Mortgage Payment, the higher will be the LTV. It is obvious that when the LTV is high, it points to the fact that you have more financial burden on your head.
Higher Down Payments is an advisable option
A very small percentage of people use their own finances to buy houses these days. Every second person is taking a house on mortgage but you need to perform certain calculations to adopt for a safe alternative. People who have the affordability pay 50% or even more as down payment. This leaves fewer burdens for the later stages. If the LTV value is high, you may get the financial assistance with a small down payment sum but in the long run, this option would exert more financial pressure. This is because the monthly instalment would be a much larger sum. Hence, intelligent thinking is that you should pay the maximum possible percentage of the appraised value as down payment.
What is a good LTV ratio?
Simply submitting an application for home mortgage does not mean it would necessarily be accepted. Financial companies have a proper testing system through which the application is scanned. Some key parameters including the down payment and LTV value are checked. Applications are accepted only if they meet the desired criteria. Similarly, the ones that do not meet the minimum standard are rejected. To get your mortgage application accepted, you should know what a good LTV ratio is. This would obviously increase the chances of the application being accepted.
Most loan giving institutions require loan takers to make a minimum of 20% down payment. The remaining 80% is taken as mortgage. The numerical value obviously depends on the appraised property price. For instance, let us consider an example. If the appraised value is $100,000 and 20% is paid as down payment, $20,000 would be the down payment figure while $80,000 would be the mortgage value. In an overall manner, an LTV ratio of 80 or less comes in the good range. If your LTV ratio is more than 80 percent, the chances of the application being accepted would be lower.
Factors making an impact on the LTV value
If you go through the LTV formula, you would easily determine the factors that have an impact on the LTV value.
Appraised Value and its effect on LTV
What is the appraised value and which amount does it refer to? The appraised value is the total property price. This includes the mortgage payment as well as the down payment. If you have paid $20,000 as down payment and the mortgage amount is $80,000, the total appraised value would be $100,000. If the mortgage payment and appraised value are on the higher side, the LTV ratio value would be on the higher side as well. Hence, to keep the LTV on the lower side, it is advisable to reduce the mortgage payment and choose a property with a lower price. Applicants who submit higher down payment sums need smaller mortgage payment sums and this decreases the LTV value. Thus, this increases the chances of the application being accepted.
Mortgage Payment and its effect on LTV
Along with appraised value, mortgage payment is the second factor affecting the LTV value. Mortgage payment is the amount taken as loan. The greater it is, the greater would be the LTV value. Hence, financial advisors always advise that loan applications should submit the maximum possible percentage of the appraised value as down payment.
Restrictions of LTV
It is an undoubted fact that each financial option has its limitations and LTV is not an exception by any means. One of the key restrictions of LTV is that it only provides support for primary mortgage. LTV does not apply when you have multiple mortgages on one property. This does happen when one person takes mortgage and then defaults. In such situations, CLTV (Combined Loan to Value) is applied.
Loan-to-Value vs Combined Loan-to-Value Ratio
It is important to identify the difference between LTV and CLTV. Combined Loan to Value ratio is applied when multiple mortgages are applied on the same property. This concept is applied when someone takes a property on mortgage and then defaults. When the second person buys the property, he has to go through the conditions of CLTV.
Summing It Up
Getting finances for buying a home is not as easy as it seems. LTV is one of the major concepts which you need to know about. To start with, LTV is the ratio of the amount you have taken as loan (Mortgage Payment) to the total property value (Appraised Value). Mortgage Payment is basically the difference between Appraised Value and Down Payment. Thus, higher mortgage payment means that a low down payment has been made. Similarly, if you are paying a higher percentage as down payment, it would increase the mortgage payment.
On an ideal scale, a minimum of 20 percent should be paid as down payment. Applications with more than 80 percent mortgage payment are likely to be rejected. Financial loan giving organizations have a particular methodology to review house mortgage applications. People who make large down payment percentages have greater chances of getting their applications approved.
In an overall manner, it is important to know about LTV. Before you apply for a mortgage application, you should know about LTV and the impact it has on your application and payments.
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