how does ltv affect mortgage rate?

How Does LTV affect mortgage rates?
Your loan to value(or LTV) is one of many factors that are part of the risks that banks take in consideration when originating loans that are secured by real property.

There are different ways a loan to value can affect your interest rate. For refinances, taking cash-out of your home above 70% of the ltv typically will begin adjusting your rate. Taking cash-out of your home to consolidate debt, or for whatever reason, increases the risk on your loan slightly. It still often makes makes sense, howver, to take out some cash despite a slight rate increase.

The higher the LTV of the mortgage the higher the interest rate will be in most cases. The higher interest rate is a direct reflection of the risk the lender is taking to loan against the property at higher LTV levels.

The higher your LTV, the higher the risk the lender takes to give you a loan. If you were to default and you owe 100% of what your home is worth, the lender is going to have a hard time selling your house just to make their money back.

While a higher LTV affects your mortgage rate and generally increases it due to the higher risk, a low LTV can sometimes help you to obtain a mortgage at a rate that you probably would not normally qualify for. Having a low LTV can be considered what is called a "compensating factor" and will weigh in heavily to an automated underwriting system and help to improve loans that would probably have been declined with a manual underwriter. If you have some blemishes on your credit then you may want to ask your mortgage broker if he/she has access to an automated underwriting engine to help better your chances at being approved with a good low mortgage interest rate.

Loan to value (LTV) affects interest rate because the higher your loan balance the more risk there is to the lender. Lenders will then charge a higher rate to offset that risk.

» DISCLAIMER: The information contained in this article on 'how does ltv affect mortgage rate?' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.