4 Disadvantages of High Loan to Value Loans

The loan to value (LTV) ratio is the ratio of the amount of money you borrow through a mortgage or home equity loan to the value of your home. When this ratio exceeds 80%, it is considered to be a high LTV loan. Typically, the maximum loan to value ratio lenders will allow is 80%; however, there are times when they will offer customers a loan with an LTV ratio that not only exceeds 80%, but reaches or even exceeds 100%, meaning that they are allowing the customer to borrow more than the value of their real estate. This could mean no down payment on your mortgage, or all (or more) of your home’s equity to spend on an improvement project. Sounds good, right? Maybe not.

When a borrower applies for a high LTV loan, especially on a first mortgage, it is something of a red flag to lenders, because borrowers who cannot make a substantial down payment are more likely to default on their loan. Then, if they are approved, they might be put in the sub-prime category, or they might be given higher interest rates and tighter qualifications. But when a lender sees that a borrower has a very good credit history, they may be willing to allow them to take out a loan with a high LTV ratio, because they know that they are responsible borrowers who are likely to make their payments on time. If you are given an offer like this, you have to take care to understand all the conditions before accepting the loan. Here are four disadvantages that you should be aware of when considering a high LTV loan:

• High Interest Rate.  A high loan to value mortgage or home equity loan is likely to come with a high interest rate.

• Private Mortgage Insurance (PMI).  You may have to get Private Mortgage Insurance with a high LTV mortgage.

• Fees raise your debt. Even if your principal is not more than the value of your house, do not forget to take into consideration the costs and fees. Common fees on both mortgages and home equity loans include closing costs, points, appraisal fees, and prepayment penalties. These and other fees could raise your debt to more than your house is worth, even if your original intention had been to borrow less than 100% of the value of your home.

• You might lose tax benefits. The interest on mortgages and home equity loans is usually tax-deductible, but if you take out a loan with a loan to value ratio above 100%, the amount by which your loan exceeds the value of your house is unsecured. The interest on that extra amount would consequently no longer be tax-deductible.

The most important thing to do, as is the case when you are shopping for any financial product, is to carefully research your different options. Whether you are buying a house and will need a mortgage, or you already have a house and need to borrow some money against it for a large project or purchase, check the ratesand offers of several different lenders before hastily making a final decision, so you can be assured that you are getting the loan that will save you the most money and that will best fit your needs.

Source: Informa Research Services