First Time Home Buyer: What is the LTV Ratio When Buying a House in Phoenix AZ?
During the process of buying a house in Arizona, you most probably will hear the term LTV ratio. So, what is LTV ratio and why it is important for buyers?
What is LTV?
LTV ratio is known as Loan-to-value ratio, is a comparison of amount of money borrowed (mortgage) and the value of your home. To calculate LTV, lender will divide the loan amount by the home appraised value. For example, a borrower taking on a $160,000 mortgage with 20% down payment to purchase a home that appraised at $200,000 would have an LTV ratio of 80.0% ($160,000/$200,000).
Why LTV Ratio is important?
LTV is a key risk factor that lenders consider when evaluating a loan application. Lender will evaluate borrowers loan-to-value ratio during loan process. In general, borrowers with lower LTV ratios are considered less risky to lender and will qualify for lower mortgage rates than borrowers with higher loan-to-value ratios.
Loan-to-value ratio and Private Mortgage Insurance (PMI)
Most lender use LTV ratio to determine whether you need to purchase private mortgage insurance (PMI). Generally, assessments with high LTV ratios are seen as higher risk. If the mortgage is approved, the loan generally costs the borrower more to borrow with higher interest rate. Additionally, a loan with a high LTV ratio may require the borrower to purchase mortgage insurance to offset the risk to the lender.
You might be interested:
What is Debt to Income Ratio?
What is an Appraisal when buying a house?
What is Private Mortgage Insurance (PMI)?
FHA Loan vs Conventional Loan Which Mortgage is right for you?
How Important Is Your Down Payment on a Home?
Swee Ng, Realtor and Phoenix East Valley resident specializing in win-win real estate transaction through great communication and fighting for his clients’ best interest. After all, this is more than real estates, this is about your life and your dreams.
If you are looking to buy or sell your home in Phoenix AZ area, we hope you will consider us. Contact us today for complimentary consultation.
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