What is considered a good loan-to-value ratio on a mortgage?
If you're a buyer who's taking out a mortgage, your loan-to-value ratio will depend largely on the size of your down payment, and there's no right or wrong number, according to our experts.
Your loan-to-value ratio is calculated by comparing your loan amount to the value of your home.
"For example, if the loan amount is $300,000 and the appraised value of your unit is $400,000, the loan-to-value ratio is 75 percent," says Robbie Gendels, vice president of National Cooperative Bank (FYI, a Brick sponsor).
Naturally, the larger your down payment, the smaller your loan and your loan-to-value ratio. In New York, co-ops typically require a down payment of at least 20 percent, whereas condos tend be more flexible and allow buyers to finance at higher rates.
"Down payments required can start from as little as a 5 percent," Gendels says. "But for conventional loans, to avoid private mortgage insurance, a buyer has to put down 20 percent down."
Private mortgage insurance is designed to protect the lender in case the borrower stops making payments on your mortgage. It is required when your down payment is smaller than 20 percent. Buyers typically pay their mortgage insurance through a monthly premium that's added to their mortgage payments, as the Consumer Financial Protection Bureau explains here.
Another consideration is that a high loan-to-value ratio can mean a higher interest rate on your loan, which takes longer to pay off.
"The best for some people who are buying a lower-priced apartment would be to keep the loan a conforming loan and thereby reduce the interest rate," says Deanna Kory, a broker with Corcoran. For buyers with good credit, conforming loans are backed by the Federal Housing Finance Agency and have lower interest rates.
On the other hand, some buyers will find there's an advantage to a large loan-to-value ratio:
"For others, they will want a higher mortgage to take advantage of the highest ratio to get a larger tax deduction, and the slightly higher interest rate is not an issue for them," Kory says. Homeowners with mortgages of less than $1 million can deduct the interest they pay on their loans.
In short, there is no ideal loan-to-value ratio, because the number depends on the needs and lifestyle of the individual buyer.
"We see people who buy very large homes who pay cash, and others who take out a 75 percent loan-to-value mortgage," Kory says. "Each person has their own reasons for that, which vary depending on their financial profile and goals."
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