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What is a loan to value (LTV)? How does it determine the size of my loan?
Loan-to-value or LTV is the percentage determined by dividing the amount of the loan by the appraised value of the home. For example, you want to purchase a property valued at $300,000 and plan to get a loan for $250,000. The bank will divide the loan amount ($250,000) by the value ($300,000) and determine that your loan-to-value ratio is 83 percent. LTV is used by banks and lending institutions when calculating the level of risk involved in lending you money. High loan to value is usually determined as above 80 percent. Lenders may make borrowers with higher loan-to-value percentages buy mortgage insurance, which protects the bank’s interest in the property and will increase the amount of the purchaser’s monthly mortgage payment. Conversely, borrowers with lower LTV percentages may be offered lower interest rates, because banks believe they are lower risk borrowers. As a borrower, you can affect your LTV by making a larger down payment which will require you to borrow less money to fund your purchase. So in fact, LTV doesn’t actually determine the size of your loan. Rather it’s the size of the loan that will determine the loan to value.
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