Home Equity Loans: Know Your LTV

[Feb 20, 2010.]

 

What Is LTV

A normal down payment on a home purchase is 20%. That means that at the time of the purchase, the bank owns 80% of the equity, significantly more than you. If something happens to the property or the value declines, the bank is at risk for the greatest percentage of the loss. As time goes by, you own more and more of the home until eventually your business partner, the bank, is out.

The percentage of the home that you own is calculated using a current appraised value and the current principal balance owed on your home loan. This calculation is called your loan to value ratio, or LTV to mortgage lenders. The lower your LTV, the greater the percentage of ownership or equity you have in your house. For example, if your home is worth $200,000 and your mortgage balance is $100,000, you have a 50% loan to value ratio or 50% LTV.

Why LTV Is Important To Home Equity Loans

It all has to do with risk to the home loan lender. Believe it or not, home loan lenders do not ever want to foreclose on your house if you stop making your monthly payments. Lenders want to make and sell loans for profit. They are not in the real estate sales or property management business. If your loan is sold to a servicer, as happens with most loans, the same can be said about servicers. No one making or servicing your mortgage wants to deal with foreclosure.

That said, of course the lender will foreclose if you don't make your payments. And if foreclosure ever becomes necessary, the lower the loan to value ratio, the more likely the home loan lender will be to recuperate most of what they are owed. A low LTV is especially important to home equity loans because most home equity loans are in a second position. Foreclosures on seconds are tough, because the home equity lender would have to satisfy the first mortgage before foreclosing.

Better Interest Rates On Home Equity Loans With A Low LTV

If you are applying for a new home equity loan, you will find that lenders are very conservative with LTV ratios these days. In times when housing markets are declining, lenders will be less inclined to offer 100% home equity loans. If you can find a lender who will go to 100%, it may be very expensive. The interest rate on home equity loans should be significantly better if your LTV is low.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.