Loan to Value & Mortgage Rates

Loan to value is one of the largest factors that affect mortgage rates. It is the ratio of the amount of your loan or mortgage to the appraised value of the property. The lower the loan to value the more equity you have in your home. Think of the equity in your home as the lender’s “security blanket”, the bigger that blanket or more equity in your home the more security for the lender. When the lender has more security they have less risk in extending a mortgage on the property.

Lenders only have two ways to price risk when making mortgages. They can either charge an upfront fee on a mortgage to offset risk, or they can charge a higher mortgage rate on your mortgage to offset it. Thus the lower a property’s loan to value the less risk to the lender which correlates to a lower mortgage rate.

Lenders learned the hard way during the last decade that when you have high loan to value mortgages especially those with zero down-payment the chances of people letting the mortgage go into foreclosure is very high. So today lenders don’t allow zero down-payment mortgages anymore.

For those loans with higher loan to values such as 95%-97% you will pay a the highest rate all other factors being equal. The next “break” is for mortgages with a 90% loan to value. Your mortgage rate will be lower with a 10% down-payment on your mortgage loan.

The next “break” is for mortgage that have an 80% loan to value. When you put at least 20% down payment on your mortgage not only do you get a better rate, but you also are no longer required to have mortgage insurance on your mortgage loan.

The final “break” in loan to value pricing for a mortgage is when you have a loan to value of 60% or less. Typically most borrowers don’t put 40% down on a mortgage loan. Most often you see this very best pricing on mortgage refinancing where the borrower has accumulated a lot of equity over time and through appreciation on the home.

When it comes to getting the best mortgage rates for your home loan just remember, the lower the loan to value on the mortgage – the lower the mortgage rate for the loan!”

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