Is Your Loan-to-Value Ratio Healthy?

It is important to know about the loan to value ratio, otherwise known as LTV, when you are making a large purchase. It is important to know what the ratio is to know if you can qualify for purchases and establish your overall financial picture. For example, in a mortgage scenario, a healthy loan to value ratio is necessary to refinance the mortgage. If you owe more on the home than it is worth, you have a poor LTV ratio. Lenders will look at this when trying to decide if they should refinance any credit, or extend more credit.

How to Calculate

Calculating the LTV is just as simple as taking the amount of the loan and divide it by the value of the home. For example, a house worth $150,000 that only has a $130,000 loan on it, gives the borrowers a LTV of 87%. Or, 130,000/150,000 = 86.67 %.

In the scenario above, the house is worth more than the loan amount owed on it, and therefore the home has a healthy LTV. If you are purchasing a house, take the amount of the loan and divide it into the appraisal amount of the home to figure out what it is worth.

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