Several factors influence the mortgage interest that you can get when you buy a house. Lenders analyze credit histories and scores of all borrowers listed on the mortgage application, length and stability of your employment, the amount of your savings reserved, your total monthly income and your ratio between debt and income. In addition to these important aspects of financial health, mortgage lenders also take your loan-to-value ratio into account. This calculation represents the amount of the purchase price for the new house that is covered by a mortgage loan as a percentage. A lower loan-to-value ratio results in less share ownership in your home, which means higher mortgage costs are generated every month.
Calculation of the loan-to-value ratio
Home buyers can easily calculate the loan-to-value ratio on their home by dividing the total amount of the mortgage loan into the total purchase price of the home. For example, a home with a purchase price of $ 200,000 and a total mortgage loan for $ 180,000 results in a loan-to-value ratio of 90%. Conventional mortgage lenders often offer better loan conditions for borrowers with a loan-to-value ratio of no more than 80%.
Consequences for home buyers
There are many programs available for home buyers who allow a down payment that is lower than the traditionally recommended 20%. Mortgage lenders, including the Federal Housing Administration (FHA), offer mortgage loans with only 5% down payment, while other lenders have options for borrowers with a maximum contribution of 5%. While these programs are beneficial for buyers who cannot save enough for a large down payment, these financing options result in a much higher loan-to-value ratio, resulting in higher costs.
A high loan-to-value ratio occurs when borrowers have less than 20% equity in their home, resulting in higher mortgage payments during the term of a mortgage loan. This is partly due to higher interest rates that have been assessed by mortgage lenders. A borrower who owns less equity is seen as a greater risk for the lender, and higher interest rates can reduce that risk. In addition to the more expensive interest rates, home buyers with high loan-to-value ratios are often obliged to pay mortgage insurance premiums until they reach larger shareholdings.
Mortgage insurance referred to as private mortgage insurance (PMI) for non-governmental mortgage lenders, is calculated as a percentage of the original loan amount per year. These costs range from 0. 3% to 1. 15%, depending on the amount of the down payment and the total purchase price, and this is added to the mortgage payment each month. John Claggartijke is a cost item for borrowers. Borrowers can cancel the PMI premium if they have reached 20% of the shareholding, and lenders must do so if the home loan-to-value ratio reaches 22%.