So, you’re planning to refinance the mortgage you initially used to buy a home in Orem, Utah. Maybe you’d like to take out cash or consolidate debts. Or perhaps you’re hoping to lock in a lower interest rate or change the terms of your mortgage. Whatever your reasons for refinancing, you need to know your loan-to-value (LTV) ratio.
Loan-to-value ratio is financial metric that represents risk to a mortgage lender, and it can have a major impact on your ability to refinance and on the terms you’re offered. For more details, read on.
What is a Loan-to-Value Ratio?
Expressed as a percentage, LTV ratio is a comparison of the amount owed on a mortgage to the amount the property is worth. As you’ve made payments on your current home loan, the number has been going down – and the lower your LTV ratio, the better.
How so? Well, a lower number means you have more equity in your Orem home and, therefore, you’re getting closer to owning the property outright. What’s more, with a low LTV ratio, your refinance loan application is more likely to be approved. And, you’ll stand a stronger chance of being offered a low interest rate and favorable mortgage terms.
How to Calculate Your Loan-to-Value Ratio
Calculating your loan-to-value ratio involves just a bit of easy math. To get the number, you simply divide the amount you currently owe on your mortgage by the value of your Orem home. Then, multiply by 100.
As an example, let’s say an appraiser has valued your property at $250,000 and your mortgage balance, or the total you still owe, is $200,000. Here’s how the math looks:
200,000 ÷ 250,000 = 0.8
Multiply that by 100:
0.8 x 100 = 80
As you can see, with these figures, your LTV ratio would be 80 percent. And, your home equity would be 20 percent.
What LTV Ratio Do You Need to Refinance Your Mortgage?
In Orem, Utah, homeowners have several mortgage refinancing options. The maximum LTV ratio varies by lending program, but as we mentioned, lower numbers are always better. However, mortgage lenders will look at many factors to determine if you qualify for a refinance loan — and while a low LTV ratio can be to your advantage, a low credit score or a high debt-to-income ratio could lead to your refinance application being denied. With that being said, knowing what number to aim for is important.
The rule of thumb to refinance a conventional mortgage is that the LTV ratio should be 80 percent or less. That said, a conventional refinance may still be an option if you don’t have at least 20 percent equity – but you’ll have to pay for private mortgage insurance and you can expect to be charged a higher mortgage rate.
What if you’re refinancing into a government-backed mortgage? With FHA loans, VA loans and USDA loans, lenders are often more lenient with LTV ratio requirements. And for those with a higher loan-to-value ratio, mortgage professionals can offer advice on how to improve the number before refinancing.
If you’d like to refinance your mortgage, the professional team at Intercap Lending would be happy to help with every step. For information on our services, or to discuss your loan-to-value ratio and mortgage refinance loans for homeowners in Orem, Utah, contact us today.