Mortgages Archives - Wealth Building Tips

Mortgage Lingo Requires Study — A higher LTV could represent a greater risk for the lender because it suggests the assets behind the loan are lower

Buying a home can thrust you into a realm where the language is about like being in a foreign country. The alphabet soup of acronyms and the jargon that peppers the conversation can leave you feeling a little lost.

Understanding just one factor, the LTV or loan-to-value component, can be a big help. Basically, it compares the size of the loan you are signing to the value of the home.

The LTV mathematics are relatively simple. You calculate it by dividing the amount of the mortgage by the appraised value of the property. The lender is interested in the LTV because it is an indicator of loan risk.

For instance, on a home appraised at $300,000, if you make a down payment of $40,000, the $260,000 mortgage represents an LTV of 86 percent. In other words, your mortgage is 86 percent of the value of the home. A higher LTV could represent a greater risk for the lender because it suggests the assets behind the loan are lower. Should you default or foreclose with a high LTV, it becomes more difficult for the lenders to recuperate the outstanding balance when they resell the property. Because of that risk, they may charge higher interest in the first instance.

Lowering the LTV has a number of benefits for the purchaser. It will make applying for a loan easier and could lock in a lower interest rate. You may not be required to purchase mortgage insurance, which usually becomes a factor when the LTV is 80 percent or lower. If the value of the property should drop, you could find yourself “under water,” a term applied when the balance on your mortgage is greater than the value of the home.

You can improve the LTV by increasing your down payment, building equity as you pay off the mortgage or by proving that over time, the value of your property has increased. That requires another appraisal.

As time passes, check the numbers to see if your LTV has improved. If so, you may be able to drop your mortgage insurance.

Renting your property can increase your net worth.

Over the past few years, historically low mortgage interest rates, coupled with surging rents, has convinced some homeowners to hold onto the properties they bought, rather than selling them. Instead of becoming sellers, they become landlords. That is having an effect on the housing market, according to mortgage experts. The homes that become rental properties take a whack out of the homes available for sale. Low inventories and limited sales growth are being reported across the country.

In a CNN Money article, Glenn Kelman, CEO of the brokerage Redfin, reported that he gets the same story from people that might be expected to sell their homes, but are not going to based on the low interest and high rents. Some 19 percent of current homeowners bought or refinanced homes during the period from 2011 to 2013, when interest fell to below 3.4 percent. That represents a significant part of the potential pool of today’s home-sellers. Kelmlan interviewed several and got similar stories from them. The figures tell the tale in each instance.

Susan Young of Lawrence, Kansas, said she refinanced in 2013, obtaining a 3.25 interest rate on a 30-year fixed loan. She has since bought another home, but retains the first as a rental property. The $1,100 monthly rent she receives is several hundred dollars over expenses. She applies the profit to her mortgage.

“If the interest rate were high, I’d sell,” she said. ” But this is such a perfect loan package, I just can’t bring myself to give it up.”

The Chris Cannons of Mt. Lebanon, Pa., said they are looking at a move and anticipating starting a family. But they’re expecting to rent the Mt. Lebanon property to take advantage of the great deal they got when they bought it in November 2012. Interest was 3.4 percent on a 30-year loan and they paid a couple of points to reduce the interest further – to just 3 percent. They believe they can rent their home for $1,400 to $1,500 per month, which will meet their monthly mortgage and taxes, which amount to $1,100, with money left over.

The factor that is providing such favorable circumstances for landlords is the average 20 percent rise in rents nationwide since 2006. Even homeowners who found themselves underwater when the housing market went wacky may benefit from renting rather than selling at a loss.

On the other side of the scale is the fact that not everyone enjoys being a landlord. You are responsible for repairs to your property and must deal with sometimes-difficult tenants. You take a chance on the renters taking the same care of your property that you would yourself.

But for many, it is an attractive option if the numbers can be worked to their advantage.