Find Your Home Value
Home Appraisal Tips & Advice
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July 11, 2008
Yes, the home selling market has slowed in the past year; however, houses are still being purchased on a daily basis. What is the secret to successful home selling? The Connection between Home Value and Mortgage Loans
By Karen LawsonHome Worth Columnist
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If you're in the market for a mortgage loan, you've probably heard about appraisals, market value, and loan-to-value (LTV) ratios. How is home value associated with mortgage financing? Here is why the two topics are so closely connected.
LTV and Lender Risk
Your LTV ratio helps a mortgage lender determine how much risk is involved in making a mortgage loan to you. LTV is calculated by dividing the amount of your mortgage loan by the amount your home is worth. Generally, a lower LTV means less the risk to your lender. Here's how this works:
Let's say you're buying a home that's worth $250,000, have a $50,000 down payment, and need a mortgage of $200,000. (Please note that this example does not include typical fees and costs associated with getting a mortgage and buying a home.) Your LTV ratio would be 80% ($200,000 divided by $250,000). The more you invest in a down payment, the less risk to your lender. Lenders assume that if you make a larger down payment, have a higher investment in not losing your home.
Home Worth and Home Equity
After owning your home for a few years, it will likely be worth more than you paid for it. Home equity is the difference between current home value and the amount you owe on mortgage loan(s.) As home worth increases and your mortgage balance decreases, you accumulate home equity. The cushion of home equity can help you guard against negative trends in local real estate markets or other influences that can impact home value.
About the Author
Karen Lawson is a freelance writer with extensive experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.