How does the loan to value ratio affect my mortgage payments?
Several factors affect the mortgage rates you may receive when buying a home. Lenders analyze credit histories and scores of all borrowers listed on the mortgage application, length and stability of your employment, amount of savings you have, your total monthly income and your debt-to-income ratio. In addition to these important aspects of financial health, mortgage lenders also consider your loan-to-value ratio. This calculation represents the amount of the purchase price of the new home that is covered by a mortgage loan in percentage terms. A lower loan-to-value ratio results in a lower share ownership in your home, which leads to higher mortgage payments each month.
Calculating the Loan-to-Value Ratio
Homebuyers can easily calculate their home's loan-to-value ratio by dividing the total mortgage loan amount into the total home purchase price. .. For example, a home with a purchase price of 200 leads.000 and a total mortgage loan balance of 180.000 $ at a loan-to-value ratio of 90%. Conventional mortgage lenders often offer better loan terms to borrowers whose loan-to-value ratio is no higher than 80%.
Implications for home buyers
There are many programs available to home buyers that allow for a down payment that is lower than the traditionally recommended 20%. Mortgage loan providers, including the Federal Housing Administration (FHA), offer home loans with as little as 3, 5% down payment, while other lenders have options for borrowers to contribute up to 5%. Although these programs are beneficial for buyers who are unable to save enough for a large down payment, these loan options result in a much higher loan-to-value ratio, leading to higher costs.
A high loan-to-value ratio occurs when borrowers have less than 20% of their equity in their homes, resulting in higher mortgage payments over the life of a mortgage loan. This is due in part to increased interest rates being assessed by mortgage lenders. A borrower who has less equity in their home is perceived as a greater risk to the lender, and a higher interest rate can mitigate that risk. In addition to more costly interest rates, homebuyers with high loan-to-value ratios often have to pay mortgage insurance premiums until they achieve larger equity stakes.
Mortgage insurance, called private mortgage insurance (PMI) for non-government mortgage lenders, is charged per year as a percentage of the original loan amount. This fee ranges from 0.3% to 1.15% depending on the size of the down payment and the total purchase price, and it is added to the mortgage payment each month.Combined with a higher interest rate, PMI can cost borrowers significantly over time. Borrowers can apply to cancel PMI premiums when they reach 20% equity ownership, and lenders must cancel them when the home's loan-to-value reaches 22%.