Blog   Tagged ‘refinance’

Financial Word of the Week: Loan-to-Value

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FWOTW

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.

Special assistance

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.

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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.

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Simplifying your credit

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When was the last time you downloaded your credit score? If you can’t remember or you have never checked it, you should consider taking a look at it soon. But you’re not alone. Two thirds of the population have not downloaded their credit report in the past year, despite the fact that the average American owes $118,000 in debt. This includes mortgage, student loans, credit card debt, etc.

Pie Chart Downloaded Credit Report in Last 12 Months

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Why do you need to know your credit score? High debt combined with little to no information about your credit score could put you in a risky financial situation. If you have so much debt that you can’t keep up with it and your regular monthly bills, you might end up paying a bill late or forget to pay it at all. This will lead to a lower credit score. Then when you go to apply for a home or car loan, you could be either denied or receive a higher than normal interest rate based on your lowered score.

Unfortunately, this has become a very common scenario. Many people are living month-to-month and often carry over their credit card debt each month just like their regular bills. One third of working adults don’t pay bills on time in part due to the number of accounts they have. Many have trouble keeping up with monthly expenses, requiring them to dip into savings to cover regular expenses.

Pie Chart Pay Bills on Time

Did you know that there are ways to reduce your loan interest rates and monthly payments? You can also reduce the number of payments you owe and even earn money with rewards points from certain credit cards.

To simplify your credit, consider the following options:

  • Use the bill pay option with your bank

    This saves time and you can go to one place to manage all of your bills and schedule them to pay once per month.

  • Consolidate your debt

    Consolidating your debt allows you to have one payment for all your debt and you can usually obtain a lower interest rate. This can allow you to pay your debt in less time for less money.

  • Reduce the number of credit cards you use

    This is another way to help you keep track of your spending and bills. Consider using a credit card that allows you to earn rewards. When you use the card you can earn points toward purchases, helping you save money.

  • Take advantage of low interest rates

    If you refinance your current mortgage to the low rates available now, you can save on your monthly payment. This is also true of auto loan rates.

If you feel overwhelmed by debt and monthly bills, take advantage of these ways to simplify your credit to help you work on becoming debt-free. Even if you don’t have much personal debt, it’s still a good idea to consider these tips to organize your finances, save money, and monitor your credit.

 

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.


Mr. Burditt serves as senior vice president of customer experience in UMB’s Consumer Division. He is responsible for developmental and strategic direction of the UMB consumer customer experience. He joined UMB in 2011. Mr. Burditt earned a Bachelor of Science degree in agricultural journalism from the University of Missouri-Columbia. He also is a graduate of the Greater Kansas City Chamber of Commerce’s Centurions program.

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