When exploring the idea of buying a new home, expect to face many decisions, the most important of which are financial.
Why loan-to-value ratios matter to homebuyers
How much should you save? That all depends on your potential LTV or loan-to-value ratio. The amount you put down on a new home is important because it directly impacts your LTV and influences whether you will even be approved for a mortgage.
Let's unpack all you need to know about LTV and help you understand how it might affect your home-buying plans.
What is LTV?
First, lets get a quick definition out of the way. The LTV ratio is a percentage that illustrates the amount of a home loan when compared to the value of the home itself. In general terms, it shows how much of a property you will own versus how much of it the bank will own.
How is LTV used?
Lenders use the LTV to determine whether or not to loan you the cash needed to buy the home and to weigh how risky a loan is.
- The higher the LTV, the riskier the loan. The riskier the loan, the higher the interest rate may be.
- The higher the interest rate, the deeper you will have to dig into your pockets to pay the monthly mortgage.
You can guess where this is going: the harder it is for you to come up with a larger monthly payment, the more likely you might default on the loan. Have questions about LTV, PMI or any other part of the mortgage process? Reach out to us today. We are glad to help!
Why loan-to-value ratios matter to homeowners
Just how financially strong are homeowners throughout the country? Recently Odeta Kushi, Deputy Chief Economist at First American, answered that question when she said:
“U.S. households own $41 trillion in owner-occupied real estate, just over $12 trillion in debt, and the remaining ~$29 trillion in equity. The national “LTV” in Q2 2022 was 29.5%, the lowest since 1983. Homeowners had an average of $320,000 in inflation-adjusted equity in their homes in Q2 2022, an all-time high.”
This is yet another reason we won’t see the housing market crash. Home equity allows homeowners to be in control. For example, if someone did need to sell their home, they likely have the equity they need to be able to sell it and still put money in their pocket. This was not the case back in 2008, when many owed more on their homes than they were worth.
Homeowners today have more financial strength than they have had since 1983. This is a combination of how homeowners have handled equity since the crash and rising home prices of the last two years. And this is yet another reason homeownership in any market makes sense.