Skip to main content

What Is A Loan-To-Value Ratio And How Learning Yours Can Help You


If you're looking to take out a mortgage, a home equity loan, or home equity line of credit, you've probably heard a lot of terms being thrown around, including loan-to-value ratio. While this term may sound complex, it really couldn't be more simple. That's why we've taken it upon ourselves to explain the meaning once and for all. Keep reading to learn what a loan-to-value ratio is, how it works, and how you can use yours to your advantage.

What is a loan-to-value ratio?

A loan-to-value ratio is the measure of the size of any loans you've taken out on your home in comparison to the current value of your home.

For example, if your home is worth $200,000 and you have $100,000 left to pay on your mortgage and you want to take out a $50,000 home equity loan on the property, your loan-to-value equation would look a little something like this:

($100,000 + $50,000)/$200,000 = 0.75 or $150,000/200,000 =0.75

In this case, you would have a 75% loan-to-value ratio.

How loan-to-value ratios are used

Loan-to-value ratios are used by lenders to evaluate the risk in lending to you. You usually see them used in scenarios where the loan is secured by the home, meaning mortgages, home equity loans, or home equity lines of credit. Typically, lenders will only approve you for a loan that's worth 85% or less of the home's total value.

Conventional wisdom states that the higher your loan-to-value, the greater risk you are to the lender. Lenders prefer that you have some stake in the property - either from your down payment or making mortgage payments - so that you're more likely to protect your investment, even if times get tough.

In the event that you do stop making payments, however, capping their lending at less than the full value of the home means that, if they foreclose on you, they'll be able to sell the property for less than it's worth and still recoup their investment.

Ways to improve your loan-to-value ratio

If you're looking to get a loan, but your loan-to-value ratio is too high to be approved, don't worry. There are some things that you can do to change the numbers. They are as follows:

Pay down your loan(s)

One of the first things you can do to change the ratio is to work to pay down any existing mortgages, loans, or lines of credit that you currently have against the property. As the amount you owe goes down, as long as property values stay the same, so will your ratio.

Wait for property values to rise

This one is tricky. Another way to improve your loan-to-value ratio is to wait for appreciation to occur. Usually, this happens slowly and over time. However, if you're lucky enough to have bought at the right time in an up-and-coming neighborhood, property values may be rising more quickly than you think.

If you have questions regarding what your home is currently worth, we suggest having a professional appraisal done. That's the surest way to pinpoint a home's current value.

Make smart home improvements

Making smart home improvements is another way to raise property values - without having to wait for the ground to appreciate first. If you decide to go this route, though, be sure to do your homework and pick the home improvement projects that have the best return on investment.


What Is A Loan-To-Value Ratio And How Learning Yours Can Help You curated from Forbes - Real Estate

Comments

Post a Comment

Popular posts from this blog

Vacation rental company Vacasa buys Sterling Resorts

Vacation rental management tech startup  Vacasa  isn’t slowing down its ambitions to conquer the market: this week, it announced that it has purchased Sterling Resorts, a vacation management company on Florida’s Gulf Coast. Sterling has changed hands before: it was  bought by Pacifica Companies in 2015 and currently manages 450 homes. Now it will become a part of Vacasa’s effort to expand its presence in vacation destinations such as northern Florida, where Sterling is based. At the time of this latest purchase, Sterling’s home inventory was  down from 585 properties in 2015. Vacasa has raised more than $200 million since its launch ten years ago. Founder Eric Breon said he was motivated to start the company after struggling to find a satisfactory management solution for a cabin belonging to his wife’s family on the Washington coast. Now Vacasa seeks to provide rental property owners with “a seamless experience…through innovative technology and local staf...
Post a Comment
Read more

In An Era Of WeWork, Co-Working Space NeueHouse Sits Above The Fray

NeueHouse CEO Josh Wyatt Seuss Moments In today’s cluttered co-working landscape, it can be hard for companies to makes themselves heard over the din. Elevated co-working space  NeueHouse  wants to create an unparalleled experience for creatives through elevated programming and outstanding design. NeueHouse describes itself as “ a private cultural and collaborative space for prominent creatives, artists and entrepreneurs,” with current locations in Los Angeles and New York. In November, following an announcement of $30 million in funding , the company announced Josh Wyatt as its new CEO. Wyatt is a veteran of the hospitality industry, having co-founded Generator  in 2007, a chain of culture-focused hostels targeted at millennials, before moving on to Equinox to head the fitness brand’s hotel developments in New York City. Forbes interviewed Wyatt to talk about creativity, design, the gun threat incident at NeueHouse New York, and why he i...
Post a Comment
Read more

Could Ken Griffin's Penthouse Purchase Cost NYC Real Estate Buyers Millions?

'The Billionaire's Bunker' at 220 Central Park South is pictured on January 24, 2019, in New York - Hedge fund billionaire Ken Griffin has completed the purchase of a four-story penthouse in the building for $238 millionm- the most ever paid for a home in the US. The building is a residential skyscraper that is currently under construction. (Photo credit: TIMOTHY A. CLARY/AFP/Getty Images) Getty A 2014 bill that aims to impose an additional tax on part-time New York residents—dubbed the “pied-a-terre tax”—has risen from the dead, largely in thanks to the recent record-breaking Central Park penthouse purchase by billionaire Ken Griffin. Griffin, worth an estimated $11.7 billion and No. 45 on the Forbes 400 , reportedly bought the $238 million-dollar apartment “as a place to stay when he’s in town,” according to his representatives. The purchase drew widespread attention to the financial losses that part-time and foreign property owners can cause the city. Bec...
Post a Comment
Read more