Loan to Value Basics
The loan to value ratio plays a major role in determining whether or not you receive financing for your home.
Financing will sometimes prove to be an even more challenging process than actually finding your home in the first place. What ends up being one of the most important factors in the decision making process of the lenders is your down payment.
There are a lot of things that effect how much you end up putting down on your new home. However, one of the things that may make the most difference to you is the loan to value ratio, or LTV. This is basically the loan amount being represented as a fraction of either the appraised value or the purchase price of the home (whichever is the lowest).
So let's assume that you are going to put down 20 percent on a home (even though most people are probably going with ten percent these days). With this amount you would have a loan to value ratio of 80 percent being what's left of the balance. On this same token, if you put down 10 percent on a new home the loan to value ratio would be 90 percent.
Loan to value is just as important as credit score when lenders are in the process of determining what your interest rate is going to be. In all actuality, loan to value is even more important since it creates pricing adjustment tiers.
This is why it is so important that you find out the different loan to value thresholds and then adjust your down payment to suit them if you can. You could possibly fall into an entirely different pricing tier just by putting down 1 percent less.
Sometimes you can lower your loan to value by breaking your loan into two separate amounts. Imagine you put 10 percent down on a house and the price at 90 percent loan to value was really horrible. Rather than just getting that one loan at an extremely high price, you could get one loan that is an 80 percent first mortgage. Then for the remainder you would take out a 10 percent second mortgage. If the interest rate is higher on the ten percent loan it won't be so bad, since it is for a lower amount.
This helps you lower your loan to value ratio on the first loan to 80 percent so you will have a chance to get better prices. You would get 10 percent loan to value on the second loan, with 90 percent being your CLTV (combined loan to value). You would actually be likely to get more savings this way with the blended rates on the two loans than you would if you had just opted for the one large loan.
It is important to remember that you will have closing costs, so be sure to keep enough assets after your down payment to cover these. Plus you will want enough money to cover at least two months of payments. Loan to value ratio is more important to the financing process than people realize, so don't count it out!
Article Source: FxTradingStock.com
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Next, find out more about mortgage insurance in the best specialized website available on such delicate topic.
by: Joe Maldonado
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Word Count: 526
Date: Fri, 11 Mar 2011
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