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Tuesday, May 8, 2007

Know Your Loan-to-Value Ratio

Your loan-to-value ratio is something you should know. It's an important figure when getting or refinancing a loan or requesting the removal of private mortgage insurance (PMI).

Here's how you can figure it out.

If You Are in the Process of Getting a Loan:

1) Start with the purchase price of the property as the value for the property. (I'll use the amount $150,000 as an example.)

2) Subtract the amount of your down payment ($20,000 in this example).

3) Identify your loan amount (the purchase price minus the down payment; in this case $130,000.)

4) Divide loan amount (loan) by the purchase price (value). In this example, it would be $130,000 divided by $150,000, which equals 0.87, or 87 percent - your ratio.

5) Use this number with your lender when referring to your loan. You would say that you want a loan with an 87 percent Loan-to-Value or LTV.

**Most loans with an LTV over 80 percent require PMI.

If You Already Have a Loan:

1) Get an appraisal of your property. Once you own a home, this is the only way to get an accurate assessment of its value. (If you are just doing this for information purposes, you can save the appraisal fee and simply estimate the value by comparing your property to similar homes in your neighborhood that have sold. This will be the value number for the equation.)

2) Look on your most recent loan statement to find out how much you owe (your balance). This will be the loan number for the equation.

3) Divide the loan figure by the value figure. This is your ratio.

**If you request the removal of PMI, you'll have to provide an appraisal. In removing PMI, you may request in writing to your current lender that the PMI be removed if the ratio is 80 percent or less. If you request an appraisal and the value isn't high enough, you will still pay for the appraisal.

More on Loan-to-Value (From Wikipedia)

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