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What is the importance of fixed Loan-to-Value Ratio?
Loan-to-Value Ratio
The loan-to-value ratio (LTV) is a ratio of loan one wants to borrow to the appraisal value of property he or she can produce as a collateral.
LTV is a measure of the capability of handling a loan and repay the interest and the principle in theoretical terms.
Higher LTV value means more risk as the loan amount goes up but the repayment capability remains the same.
LTV shows how much property a borrower of the loan actually owns to the real value of the property that was charged while the borrower bought the property.
Lenders usually determine the risk associated with the loan while offering a loan to the borrower. It is also used to determine whether a mortgage insurance will be required for the loan.
LTVs are used in numerous cases, such as −
- Calculating the credit score.
- The income that is available to repay the loans.
- The quality and condition of asset one is buying.
When the credit score is good, it is easier to get higher LTV loans. LTV can show the capability of the borrower to access new loans and whether he or she will be able to bear the weight of the new loan. It can also warn of an impending danger to the lenders when the LTV is too high and beyond the repayment capability of a borrower.
What if the Loan-to-Value Ratio is Fixed?
If the loan-to-value ratio is fixed, it means that the risk of the loan remains the same even when additional loan is borrowed. For lenders, it means they won’t have to deny more loans, ask for more interest or see if a mortgage insurance is required for the loan.
Lenders such as banks usually look for LTVs that are around 80% of the total value of the loan. It means that when the lenders see that the LTV value is near that mark, they can stay assured that the borrower will be able to repay the loan on time regularly.
With higher LTV, there comes more risk. In fact, fixed LTV factor goes missing when the borrowers take loans more than their ability to repay the loans. Therefore, fixed LTV is a hypothetical term in most of the cases.
However, it is not impossible to find borrowers who maintain a fixed LTV. These borrowers are trusted by investors and the lenders tend to offer them more credit for their ability to meet the demands of lenders in time.
One of the most notable fact about LTV is that to keep it fixed, the borrowers must repay the installments in time to avoid defaults and deadlines of repayments of the loans borrowed.
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