Have you heard of the term “LTV”? In real estate, it means “Loan to Value.” A loan to value ratio is a comparison of your loan amount with the value of your home. Lenders figure out your LTV ratio by dividing the amount of your mortgage into the purchase price or total appraised value of your home.
For example, if you have a mortgage for $480,000 and your home’s appraised value is $500,000, you have an LTV of 96%. This is a high LTV ratio. In home lending, an optimal “magic LTV number” from the lender’s perspective is 80% or less. This is the reason many people think you must put a 20% down payment to buy a home.
Do I have to put 20% down payment to buy a home?
People who put 20% or more down on a home purchase are eligible for conventional 30-year and 15-year fixed rate home mortgages with lower interest rates than those who can afford lower down payments. If you have an LTV lower than 80%, you will usually not be required to pay PMI (private mortgage insurance), an additional payment that provides insurance to your lender in case you can’t meet your mortgage payments.
There are several home mortgage programs which don’t require 20% down payments, and which will make loans up to 97% LTV. In the case of VA home mortgages, you could be eligible for a home loan with no money down: in other words, up to 100% LTV.
FHA home loan programs can have as high as 97% LTV — requiring only a 3% down payment.
How does LTV affect refinancing your home mortgage?
If you’ve paid your mortgage for a while, you’re likely to have built up equity in your home, which means you will also have a lower LTV. A lower LTV can benefit your application for a 30-year fixed rate or a 15-year fixed rate refi of your conventional home mortgage. You can also apply to refinance your FHA home mortgage or VA home loan.
The LTV ratio isn’t the only number affecting your mortgage loan rates and payments. Working with a qualified home mortgage specialist will help you to know your options and be in the best possible position when you’re buying a home or refinancing your current mortgage.