Buying a house is one of the biggest investments that most people make in their lifetime. Therefore, it’s essential to understand the different terminologies used in the mortgage industry. Two of the most critical terms that you need to know are LTV and CLTV. In this article, we’ll provide a detailed guide on what these terms mean and how they affect your mortgage.
What is LTV?
LTV stands for Loan-To-Value, which is a ratio that compares the amount of the mortgage loan to the property’s value. In simple terms, it’s the percentage of the property that is financed by the lender. For instance, if you want to buy a home worth $300,000 and you’re putting down a 20% down payment, the mortgage loan will be $240,000. Therefore, the LTV ratio will be 80%.
Why is LTV important?
LTV is crucial because it determines the interest rate, mortgage insurance, and other fees that you’ll have to pay. Generally, the higher the LTV ratio, the riskier the loan is to the lender. As a result, the lender may charge a higher interest rate and require mortgage insurance to protect themselves in case of default.
What is CLTV?
CLTV stands for Combined Loan-To-Value, which is the ratio that compares the total amount of loans on the property to its value. In other words, it’s the sum of all the mortgages and liens on the property divided by its appraised value. For instance, if you have a first mortgage of $200,000 and a second mortgage of $50,000 on a property worth $300,000, the CLTV ratio will be 83.33%.
Why is CLTV important?
CLTV is essential because it helps lenders determine the risk of the loan. If you’re taking out a second mortgage or a home equity line of credit, the CLTV ratio will increase, which may make it harder to qualify for the loan or result in higher interest rates and fees.
How do LTV and CLTV affect your mortgage?
LTV and CLTV ratios are essential factors that lenders consider when approving a mortgage loan. If you have a high LTV or CLTV ratio, it may be harder to qualify for the loan, and you may have to pay higher interest rates and fees. On the other hand, if you have a low LTV or CLTV ratio, you’ll have more equity in the property, which may result in better loan terms and lower fees.
How to calculate LTV and CLTV?
To calculate LTV, divide the loan amount by the property’s appraised value and multiply by 100. For instance, if you have a mortgage loan of $240,000 on a property worth $300,000, the LTV ratio will be 80%. To calculate CLTV, add up all the loans on the property, including the first mortgage, second mortgage, and any other liens, and divide by the property’s appraised value. For instance, if you have a first mortgage of $200,000 and a second mortgage of $50,000 on a property worth $300,000, the CLTV ratio will be 83.33%.
How to improve your LTV and CLTV ratios?
One way to improve your LTV and CLTV ratios is to make a larger down payment when buying a home. The more money you put down, the less you’ll need to borrow, resulting in a lower LTV ratio. Another way to improve your CLTV ratio is to pay off any outstanding debts or liens on the property. This will decrease the total amount of loans on the property, resulting in a lower CLTV ratio.
Understanding LTV and CLTV ratios is crucial when buying a home. These ratios determine the loan amount, interest rates, and fees that you’ll have to pay. Therefore, it’s essential to calculate your LTV and CLTV ratios and try to improve them if necessary. By doing so, you’ll be able to qualify for better loan terms and save money in the long run.