When you decide to refinance, your home equity makes a big impact. Equity is determined by the difference of the current mortgage’s balance and your home’s appraised value. You’ll receive more refinancing choices with higher equity in your home. Also, the amount of equity will determine if you’ll have to pay for (PMI) private mortgage insurance or not.
One critical key used with refinancing is your LTV (loan-to-value) ratio. Equity helps lenders determine your LTV.
Determining Loan-To-Value
The LTV is the amount of your balance remaining on your mortgage. Here’s the standard method to determine LTV for refinancing:
Take the present amount owed and divide it by the present appraised value. For instance, you may owe $140,000 and your home’s value is $200,000. Your LTV calculation would be:
$140,000 / $200,000 = .70
Multiple .70 by 100% which equals a LTV of 70%.
You can qualify for a lender’s refinancing guideline if it’s 80%. In addition, because you owe less than 80%, you might have the opportunity to get the full 80% and receive the extra amount for cash-out refinancing.
LTV Combined Loans
If you have a second mortgage you can combine its balance with your original mortgage’s balance. This LTV calculation would be:
Combined present loan balances / present appraised value
Whether or not you refinance both loans, since consolidating 2 loans requires additional time, inform your lender ahead of time.
LTV Makes A Difference
How much financial credibility you have is partly determined by your LTV ratio, your credit score and debt-to-income ratio. Qualifications for refinancing depends on the lender’s guidelines for LTV. This usually ranges from 75% to 95%. Several government assistance programs might provide 105% of refinancing assuming you qualify. A LTV that’s too high may prevent refinancing, but you can wait for the home’s value to rise or pay more on the principal.
Lenders might let you refinance with a higher LTV if you have:
High credit score
Low debt
Little equity
Falling local market prices
An Appraisal
Keep your home’s value with regular upkeep and any needed improvements. Keep in mind that market conditions can impact the appraised value regardless of home maintenance.
