Buying a house as a primary residence or as an investment can be very fruitful but they are also expensive. In many cases, the most expensive of all investments are the ones that are made on property. If you do not have the money to pay up front, you may want to go for a mortgage. A mortgage is a loan that is taken on the property and is paid every month for a given number of years. The payments are divided into interest and principle. Before a bank or a home loan agency offers you a mortgage option, it will do you good to make a loan-to-value-ratio of the property to know how much you can actually get as a loan and for the lender to know how much of a risk it will be taking by giving you the loan.
Loan-to-value ratio calculation
The loan-to-value-ratio is an estimate that will also be an important factor in deciding how much you will end up paying. It is a risk assessment and if the percentage is higher, the monthly payment will also be on the higher side. Take for example a person who wants to purchase a piece of property that is worth $100,000 and wants to borrow $90,000. so he will have to borrow 90% of the property’s value. It is simply calculated as the loan value minus the down payment that you are willing to lay upfront divided by the total value of the property. The resulting number multiplied by 100 will make it a percentage.
Most banks require a loan-to-value-ratio of at least 75%, so anything higher will mean more in terms of monthly payments and more money will go out to interest as well.
Assessment of risk before a mortgage is offered involves a lot of different calculations and loan-to-value-ratio is only one of the many scales used.