Down Payment and Loan-to-Value Ratio

Lenders prefer a borrower who makes a large down payment and a mortgage with a low loan-to-value (LTV) ratio. Your loan-to- value ratio is simply your mortgage amount divided by the value of your property (see Figure 1.1). The value of your property is your purchase price or the appraised value, whichever is lower. Usually, they are the same.

Throughout this edition of The Mortgage Kit, there are many references to LTV ratio. The amount that you can borrow, your effective interest rate, and the availability of certain types of mortgages depend on your LTV ratio. Mortgage insurance (see Chapter 6), which costs hundreds of dollars a year, is required if your LTV ratio is more than 80 percent. Investor loans (see Chapter 7) are difficult to find with an LTV ratio higher than 90 percent. Qualification ratios (see Chapter 2) are stricter for high LTV ratios. Very large loans are available only with LTV ratios of 80 percent or lower, which means that your down payment must be at least 20 percent of the property value. Finally, high LTV loans cost more than low LTV loans.

FIGURE 1.1 Loan-to-Value Ratio

Loan-to-Value Ratio

For all of these reasons, it is important to know approximately what your LTV ratio will be. Chapter 5 and the Mortgage Data form in Appendix D help you estimate your LTV ratio.

Calculating Your Monthly Payment

Your monthly mortgage payment includes not only principal repayments and interest on your loan, but also an additional amount known as escrow to cover real estate taxes, homeowner's insurance, and mortgage insurance (if required). Your lender then pays your tax and insurance bills for you when they come due. Sometimes lenders require that you pay enough to cover condominium/home- owners' association dues as well. This whole package of payments is known as PITI (principal, interest, taxes, and insurance).

The sample PITI form in Figure 1.2 shows how to calculate a total monthly mortgage payment for a 30-year loan of $100,000 at 8 percent interest. (A blank form and detailed instructions are in Appendix A.)

The principal repayment and interest make up the largest portion of your monthly payment. Calculate this by multiplying your loan amount by your loan's payment factor divided by 1,000. The payment factor depends on the interest rate and term of your loan. The payment factor for an 8-percent, 30-year loan is 7.3376. The instructions for the PITI form in Appendix A include an abbreviated table of payment factors for 15-year and 30-year loans from 2-per- cent interest to 17.875-percent interest. Appendix I contains a complete table of payment factors for fully amortizing loans with terms of one year to 30 years, 35 years, and 40 years, and with interest rates from 2 percent to 19.875 percent.

Getting Started on Your Mortgage

Throughout this book, simple terms have been used in an attempt to break down what can be a complicated and stressful process. There is often a feeling of not being in control during the process as well as the suspense of waiting to get an “answer” on your loan application. Just remember that when you are buying a

FIGURE 1.2 Sample PITI Form

Sample PITI Form

house and getting a mortgage to finance your purchase, everyone is on your side. The real estate agent does not get paid if the home purchase is not consummated. The loan officer usually gets paid on commission, so he or she does not get paid unless your loan is approved and closed. The mortgage company makes money not by turning loans down or by arbitrarily making you jump through hoops, but either by originating loans that can be sold at a profit or by collecting interest on the loan over the years. So, consider that, although some of the requirements may seem unintelligible, there are valid reasons for lenders requesting the types of information that they do. We hope that this book is helpful to you in that process and that some of the terminology will be more familiar to you after reading this book.

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