The loan to value ratio refers to that number which is used by the lender for the purpose of determining the level of risk that they will be taking on if the borrower is borrowing a secured loan. It is also known as the LTV ratio. Usually the mortgage lenders use this ‘loan to value’ ratio. Now in general, if the value of the loan to value ratio is high then it means that there is more risk as compared to the one in which the value of the loan to value ratio is lower. Normally this LTV ratio has an impact on your monthly payments and also on the amount of interest that one has to pay over the entire span of their loan period. So it is always considered better to have a lower value of the LTV ratio.
Why is the LTV ratio important for a mortgage?
The LTV ratio is a determining factor when it comes to making a mortgage, home equity loan or a line of credit secure. Along with that it also plays a very crucial role in determining the amount that will cost to a homeowner for the purpose of borrowing. Also at times it is quite possible that if the LTV ratio is high, it may prevent one from being able to qualify for issuing of a loan or a refinancing option at the first place.
Now in a majority of the cases, the lenders tend to offer the home equity loans or the mortgage at the lowest possible rate of interest in the case where the LTV ratio is at or below 80%. If the borrower has a higher LTV ratio, that directly excludes the borrower from being the subject of approval for a mortgage. Also for an instance if the borrower has an LTV ratio of approx 95%, chances are that even if he gets an approval, the interest rate will be higher as compared to the interest rates of that borrower whose LTV ratio is 75%.
Also if an individual has a higher interest rate or the PMI cost that and expect a higher monthly payment in case where the LTV is high. A higher monthly payment will lead to restrictions to your cash flows but on the other hand it will also lead to paying comparatively more interest over the entire life span of the loan.
In case where the LTV ratio is more than 80%, it is highly likely that you may have to purchase PMI (private mortgage insurance). This can be anywhere in the range of 0.5% to 1%. Now these PMI payments will be continued till the time the LTV ratio is either equal to or lower than 80%. But as your payment is done, the LTV ratio will keep decreasing since the value of your home will keep on increasing with time.
Thus the LTV ratio plays quite an important role when it comes to mortgages and should be taken into consideration for sure.