How Can a Lower LTV Save You Money?

By JJ Singh
Loan Page Columnist

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Bankers are conservative people. They want to see you put in as much equity in your home as possible. The lower your loan-to-value ratio (LTV), the better.

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What is equity and why does it matter?

By definition, equity is the difference between your home's value and the balance of your loan. For example, if your home is worth $500,000 and the balance of your home mortgage is $350,000, the equity in your home would be $150,000.

Home equity is most often calculated when you are looking for an additional loan, using equity as collateral. However, assessing the home's equity is also important when first obtaining your mortgage before you've set foot in your new home. The down payment (starting equity) you make determines the loan-to-value ratio (LTV), which can affect your monthly payments.

A Lower LTV Can Save You Money

When initially buying your home, most lenders require that you make a 20% down payment. If the new home is worth $500,000, you would need to make a down payment of $100,000. In other words, the loan amount would be $400,000 or 80% of the value of your home (LTV).

However, not all lenders are so strict. You might be able to obtain a new home loan with a lower down payment, increasing the LTV up to as much as 95%. Because bankers view this type of loan to be risky, they will require that you purchase private mortgage insurance until you've made enough payments to drop the LTV to below 80%.

Ultimately, it pays to have more equity in your home. You can leverage it to obtain a home equity loan and will also use it to lower your LTV, saving you a bundle.

Sources:

What is a Loan-to-Value Ratio?

About the Author

JJ Singh is a loan consultant who has mortgaged his life away to the micro finance industry in New York City. He holds a bachelor's degree in Economics from the University of Virginia.

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