LTV: A Hidden Key to Getting the House You Want

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Bills.com outlines mortgage valuation in today's buyers' market.

In today's home buyers' market, mortgage lenders juggle many products, each labeled with jargon. "LTV" stands out as one to understand, according to Bills.com.

"Loan-to-value (LTV) can make a sizable difference in a homeowner's monthly payments," said Andrew Housser, co-founder and co-CEO of Bills.com. "The right LTV can help you buy the house you want."

LTV is the mortgage loan amount divided by the value of the home, he explained. "For mortgage lenders, LTV is a significant number, as they will offer homebuyers loan options based on different LTV scenarios."

In simple terms, an $80,000 loan on a $100,000 home would have 80 percent LTV. The difference between the home's value and the loan amount is the homeowner's equity. Therefore, the percentage of LTV and the percentage of equity add to 100 percent of the home's value. A higher LTV means a homeowner borrows a greater percentage of the home's value.

A higher LTV also means greater risk to a lender, according to Housser. "To cope with higher LTV loans, mortgage lenders typically require private mortgage insurance (PMI) to protect themselves if borrowers default on -- or do not continue to pay -- their mortgage."

Most loans require PMI if the LTV is higher than 80 percent. Housser outlined LTV-based loan options as follows:

  •     The piggyback option: Some buyers avoid paying PMI by "piggybacking" two loans: one for 80 percent LTV and one for 10 percent or 15 percent. Buyers then can put down just 10 percent (80 percent plus 10 percent mortgage plus 10 percent down payment) or 5 percent (80 percent plus 15 percent mortgage plus 5 percent down payment) of the home's price. Advantage: Buyers get more house for a smaller down payment. Also, interest paid on second mortgage might be tax-deductible, while PMI payments are not. Disadvantage: Leaves a higher cumulative LTV (CLTV). Some lenders consider the CLTV, which might limit the price of the home loan a buyer qualifies for.
  •     Paying PMI: Other buyers choose to pay for PMI. PMI payments can be removed when a borrower reaches 20 percent equity (80 percent LTV). Advantage: Unlike a second mortgage, which might be paid over 10 years, PMI might be removed after just a couple of years. Disadvantage: Buyers might pay hundreds or thousands of non-deductible dollars for insurance they do not need.

LTV and credit

"The 'ideal,' or 'traditional,' minimum down payment is considered to be 20 percent of the home's value, leaving 80 percent LTV," Housser said. "With home prices climbing faster than inflation, fewer people -- especially first-time buyers -- pay 20 percent down."

Lenders interpret higher LTV in two ways, according to Housser. First, they might believe a borrower has too little income to save enough for a down payment. Second, they might believe the buyer is overextending to purchase a home he or she can't really afford. "Either way, a lender sees risk. Higher LTV loans therefore are usually are restricted to buyers with good credit."

Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and save money by choosing the best-value products and services. Since 2002, Bills.com's partner company, Freedom Financial Network, has provided consumer debt resolution services, serving more than 10,000 customers nationwide and managing more than $250 million in consumer debt. The company's co-founders and CEOs, Andrew Housser and Brad Stroh, were recently named Northern California finalists in Ernst & Young's 2006 Entrepreneur of the Year Awards.

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Aimee Bennett
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