Financial Word of the Week: Loan-to-Value
You’ve probably heard the scary terms “upside down” or “underwater” when it comes to mortgages, especially six years ago‡. That’s one way of saying a home’s Loan-to-Value (LTV) ratio is too high or the value of the home is less than the loan amount. This is another financial number where lower is better.
Calculating your LTV ratio
Take the amount left on your mortgage and divide by the appraised value of your home OR the selling price (whichever is less). For example, if you bought a $225,000 home, but it was appraised for $200,000 and you still owe $175,000, your LTV ratio is 175,000 ÷ 200,000 = 87.5%. Now take that same scenario, but with a positive twist. If you made improvements on your home or the housing market in your area improves, let’s say your home is appraised for MORE than what you paid for it, $250,000. So your LTV ratio would now be based on your purchase price (the lesser of appraisal or purchase price) and your LTV would be 175,000 ÷ 225,000 = 77.8%. The ratio has been reduced, and it’ll keep going down as you pay more of your loan amount (assuming the value of your home doesn’t fall below your purchase price). A good ratio to aim for is 75% or less. The lower your ratio, the less risk for your lender.
Should you refinance?
It’s worth consideration, but only after an informative chat with your lender. If you have a high LTV ratio and your home’s value has increased, refinancing could be a wise step for you. Plug in a few scenarios in this calculator, and chat with your lender about whether or not refinancing would be positive for you.
If you need even more help and purchased your home before June 1, 2009, you may be eligible for Federal Housing Finance Agency’s Home Affordable Refinance (HARP) Program‡. If you think you may be eligible, talk to your lender about refinances with further assistance from that government program.
When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.
UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.