As children, we assume that adults have full control over their lives. It's a misconception that we're quickly relieved of once we grow up, and at no time is it more obvious than when we apply for loans.
Mortgages and especially mortgage refinances are hallmarks of adulthood, but applying for one feels more like asking your parents for a raise in your allowance. Lenders ask you numerous questions about your financial history and responsibility, all designed to tell them if you can afford the loan.
The Loan-to-Value Ratio
The loan-to-value ratio, or LTV, is one of the most influential calculations that your lender will perform. It describes the amount of the loan in comparison to how much the property is worth. You can also think of it as the percentage of your home that you own outright, as compared to how much is or will be mortgaged.
Calculating your Loan-to-Value Ratio
You can determine your LTV if you divide the amount of your mortgage by the appraised value of your home.
For example, say that your home has been valued at $250,000. You still owe $150,000 on the mortgage and you'd like to refinance that amount plus a $50,000 cash-out. Your LTV will be $200,000 divided by $250,000, which equals 0.8. Therefore, your mortgage refinance loan-to-value ratio will be 80 percent.
Loan-to-Value for Refinance – What It Means for Your Borrowing Odds
If you remember LTV calculations from your original mortgage application, the concept is basically the same. The primary difference is that initial mortgage holders use the amount of down payment to calculate LTV rather than the amount of equity.
When you're taking out a first mortgage on a property, your LTV depends on the size of your down payment. When you're refinancing, it tells the lender how much equity you're keeping in the home compared to how much you're borrowing.
The lender can't take that equity to pay off a defaulted loan, but they can use it to collect fees during the foreclosure process. This includes expenses related to foreclosure and sale or auction as well as late payment fees. Also, if the home receives a low appraisal before the foreclosure sale, the amount you owe won't decrease but the amount of equity you have will.
For that reason, the higher your loan-to-value ratio for refinancing is, the safer you are for a lender to approve.
What is a Good Loan-to-Value Ratio for Refinance Purposes?
If you have a conventional loan as your first mortgage, you might remember that you needed an 80 percent LTV, which translates to a 20 percent down payment. That's usually the maximum that lenders accept.
Lenders want to make sure that they can recover their investment no matter what. If they lend you more than 80 percent of your home's value and the appraised value drops, they might have a hard time getting enough at auction to break even.
When you're refinancing, lenders are a bit more forgiving. The rate depends on your personal finances as well as:
- The number of residential units in your home
- Whether you're applying for a fixed or adjustable rate mortgage
- Whether you want a standard or cash-out refinance
- If the home is your primary residence, second home, or investment property.
Because there are so many variables, the acceptable loan-to-value ratio for refinancing can vary significantly.
The lowest maximum LTV is 60 percent for the adjustable rate cash-out refinance of a two- to four-unit investment property. The highest is 97 percent for a fixed rate refinance on a single-family primary residence.
How Low Can You Go?
The maximum available LTVs are just absolute cut-offs. The closer you come, the harder it will be to get a mortgage. This is especially true for single-family homeowners with high LTVs.
Lenders may accept LTVs as high as 97 percent for a refinancing loan, but those are rare. You might even see 95 percent published as the hardline maximum. And even then, a loan with a good rate will be hard to get.
Lenders usually still want to see that 80 percent LTV that they demand for first mortgages, especially if you're trying to cash out. Any lower and you might be able to get a loan, but you'll likely have to get mortgage insurance and agree to high interest rates.
Alternatives to Refinancing
If your LTV is too high for you to affordably refinance your mortgage, don't give up. There are alternatives.
Instead of cashing out, for example, you could take out a home equity loan or home equity line of credit.
A home equity loan works like a second mortgage. You receive a percentage of your equity as a lump sum, then you repay it in fixed monthly payments.
A home equity line of credit, or HELOC, works more like a credit card. You get approved to borrow against a percentage of your equity but you don't have to take it all at once. You can keep borrowing as needed up to that maximum, as long as you continue to repay according to the terms of the agreement.
Your options are fewer if your goal is to reduce your monthly payments. You can always choose to sell your home, but then you incur the expenses of finding a new place to live and paying for the move.
There are also the psychological costs of leaving the home that you love. If you're already experiencing the stress of money troubles, the emotional burden of moving can be intense.
A Safer Alternative – Sell and Stay
To help homeowners avoid this kind of painful situation, EasyKnock has developed a sale-leaseback program known as Sell and Stay. It allows homeowners to sell their property to the company and remain in place as tenants, paying rent until they're ready to repurchase the home or relocate. The terms of either choice are set out in the initial agreement in clear, user-friendly language.
Take Control of Where You Live
Forget about LTVs and lenders telling you whether you can or can't afford to live in your home. Sell and Stay puts you back in control and lets you make decisions about where you want to live and for how long.
And because it's not a loan, it doesn't require you to have a certain LTV. In fact, the application process is much simple and less invasive than a refinance or home equity loan application. Contact the company today and find out how you can get started.