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Mortgage Refinancing and Your Loan to Value Ratio (LTV)

mortgage-ratesIf you are considering mortgage refinancing, understating loan-to-value ratio could make the process less painful for you. Many homeowners glaze over at the “technical terminology” associated with mortgage loans like loan-to-value ratio and yield spread premium. If you are such a homeowner here are the basics you need to know about loan-to-value when refinancing your home loan.

Why Loan-to-Value Ratio is Important

When most people talk about loan-to-value ratio when it comes to a mortgage loan they are talking about avoiding Private Mortgage Insurance (PMI). While avoiding private mortgage insurance is important and can save you hundreds of dollars every month, loan-to-value ratios influence other aspects of your home loan including mortgage rate, payment amount, and loan approval.

Loan-to-Value Ratio Definition

Simply put your loan to value is the ratio between your mortgage amount and the value of your home. Suppose for instance you have a $200,000 home with a $100,000 mortgage loan. Your loan-to-value ratio or LTV in this example is 50 percent.

Different types of mortgage loans and lenders have different requirements for LTV ratios. Your primary residence for example can have an LTV as high as 96.5 percent and still qualify for an FHA mortgage loan. Conventional mortgage loan requirements range anywhere from 95 – 97 percent LTV. Thinking about a VA or Rural Housing loan? These loans can go as high as 100 percent LTV.

If avoiding Private Mortgage Insurance (PMI) is your goal you will need to have the loan-to-value ratio below 80%. Private Mortgage Insurance can add hundreds of dollars to your monthly payment amount and does nothing to protect the homeowner; this insurance simply protects the lender from certain types of losses if you default on your mortgage loan. Having a lower LTV ratio can also affect the mortgage rate you get when refinancing your home. Generally the lower your LTV the better your mortgage rate will be which in turn gives you the lowest monthly payment amount.

Having a favorable loan-to-value ratio could mean the difference between getting your loan approved or denied if you are a homeowner with less than perfect credit. Having a low loan-to-value ratio reduces the risk for the mortgage lender, making you more loan worthy. You can learn more about lowering your mortgage rate and payment amount when refinancing while avoiding lender junk fees by registering for the free mortgage videos available on this website.

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