Understanding Loan-to-Value Ratio

If you are looking to obtain a loan that is secured for your San Diego house the term “loan-to-value ratio” will come into play. It might sound like a fancy name, but it’s actually a very simple calculation that San Diego home buyers really should understand.

What is loan-to-value ratio?

A loan-to-value ratio is a number used to show the total loans that you have secured by your San Diego house compared to the total value of your house. In order to calculate the ratio, you total up the loan totals and then divide it by the value of your house.

Here is a simple example: Imagine that your San Diego home is valued at $300,000 and you still owe $150,000 on your mortgage and also have a home equity line of credit in the amount of $25,000. In this scenario, your calculations would look like this:

Loan totals: $150,000 + $25,000 = $175,000

San Diego Home value: $300,000

Loan to value ratio: $175,000 / $300,000 = 58%

What kind of ratio do you want to have?

Obviously, the lower your ratio is the better it is for you. That means you have more equity in your property and are getting closer to owning it outright.

The numbers start to matter more when you are looking at taking out a loan that is secured by your house. This starts with when you first purchase your San Diego house. Then, it’s reconsidered for each additional loan that is secured by your house.

In order to obtain a loan, your loan-to-value ratio needs to be lower than 85%. They want to see that you are invested into the loan as well. This matters to your lender because they want to see if you are a safe risk to loan money to. In their opinion, if you stand to lose equity if you default on your loan as well then, they are more likely to think that you’re a safer bet to approve for the loan.

What can you do to improve your ratio?

There are a few ways that you can improve your ratio. Some of them are in your control and some are not.

One of the easiest ways to improve your loan is to pay down on your loan balances. This will help to grow the difference between your loan balance and the value of your San Diego house. This one is in your control but not always easy if you don’t have extra cash on hand.

Another option is to simply wait for property values to rise. Generally, this will happen over time, but you have no guarantee and it will most likely take years. Now, if you bought a house in a neighborhood that was being renovated there’s a better chance that you will experience a quick increase in value.

One final way that you can improve your ratio is to make improvements to your San Diego house. You will need the finances on hand in order to do this. But, if you make the right renovations, you should be able to increase the value of your home.

However, you should do this with caution because you don’t want to spend money for the sake of improving the value if it really isn’t going to improve the value at all.