Calculate Loan-To-Value Ratio of Real Estate Property
Lenders will provide mortgages based on many factors, one being the loan to value ratio or LTV of the property. The type of property, whether owner-occupied or investment, will usually determine different maximum allowable LTV ratios. This ratio is expressed as a percentage and is derived by dividing the mortgage amount by the lesser of the selling price or appraised value.
Using the selling price or appraised value of the property, determine the available or desired down payment and the desired mortgage amount that would be needed. The home selling for $300,000 and the buyers have $40,000 available for a down payment.
$300,000 - $40,000 = $260,000 desired mortgage amount.
Divide the mortgage amount by the selling price and convert the result to a percentage.
$260,000 / $300,000 = 0.87 or 87% which is the LTV ratio.
Though you may be buying a property below the appraised value, and considering it a bargain, the lender will use the lower purchase price in this calculation.
Mortgage Types & Uses
The loan-to-value ratio is used in most qualifying processes, though it's just one of many different factors that may be considered. Of course, commercial loans have different criteria than residential loans as well. There are choices for mortgages, and the characteristics will be a part of your decision, not just the interest rate and payment.
Fixed Rate Mortgage
This is the basic mortgage with an equal payment every month until it's fully paid off. The simple P & I payment is made up of two components, principal, and interest. As the loan is paid down, the interest component goes down each month and the principal amount goes up, adding to the equity in the property.
There is the most popular 30-year fixed rate mortgage and the other frequently used 15-year fixed rate loan. With that one, the mortgage pays off in half the time with higher payments and a lot less interest paid over the life of the loan.
ARM, Adjustable Rate Mortgage
An adjustable-rate mortgage (ARM) is a loan with an interest rate that changes. ARMs may start with lower monthly payments than fixed-rate mortgages, but keep in mind the following:
- Your monthly payments could change.
- They could go up — sometimes by a lot—even if interest rates don’t go up.
- Your payments may not go down much, or at all—even if interest rates go down.
- You could end up owing more money than you borrowed— even if you make all your payments on time.
- If you want to pay off your ARM early to avoid higher payments, you might pay a penalty.
An example would be a 7-year ARM with the interest resetting seven years down the road. Depending on rates at that time, it's anybody's guess where the payment will be. One reason for getting an ARM other than betting on lower rates would be getting a lower payment in the first years of ownership.
Investors use blanket mortgages when they own multiple properties with equity. They can open a line of credit with a bank or get this loan by allowing the lender to use the other properties as collateral. The properties back the loan and the proceeds can be used for other investments.
Reverse mortgages are becoming popular without aging population. Particularly when approaching retirement, homeowners with significant equity can get a reverse mortgage that pays them a monthly payment as long as they live. The monthly payment amount is based on the home's value, equity, and age of the borrower(s). There you have some of the most popular mortgage types, and every one of them uses in some way the LTV, Loan to Value ratio.