Combined Loan To Value With Second Mortgages

Two of the most confusing terms there are in the mortgage industry are loan to value (LTV) and combined loan to value (CLTV). Both can be used to estimate the amount of home equity you have. However, there are key differences, as detailed below.

LTV

LTV is the ratio of the fair market value of your house to the loan balance. Here's an example LTV calculation for a new purchase:

Purchase Price: $200,000

Down Payment: $40,000

   1. Subtract the down payment ($40,000) from the $200,000 purchase price to get the loan amount of $160,000.
   2. Divide the $160,000 loan amount by the $200,000 purchase price to get 0.8, which equals 80% LTV.

For an existing loan you've had more than 12 months:

   1. Get a professional appraisal of your property (costs about $350).
   2. Look on your most recent loan statement to find out your loan balance.
   3. Divide the loan balance by the appraised value for your LTV.

The LTV, as LendingTree.com states, is important to lenders because the higher your LTV, the lower your home equity. And lenders view borrowers with low equity as having a greater risk of defaulting on their loans. Lenders generally charge higher interest rates on high LTV loans, as well.

CLTV

CLTV is the ratio of the fair market value of your house to the loan balances of ALL mortgages. Here's an example CLTV calculation for a home with a 2nd mortgage (owned more than 12 months):

Appraised Property Value: $250,000

Mortgage Balance: $100,000

Second Mortgage Balance: $25,000

   1. Add $100,000 to $25,000 (balances of 1st and 2nd mortgages) for a total of $125,000.
   2. Divide $125,000 by $250,000, and you get 0.5 or 50%.

Lenders generally have a minimum LTV or CLTV of 75% to 85% before extending you a mortgage refinance, second mortgage (home equity loan or line of credit) or second mortgage refinance. However, some may let you cash out on up to 100% to 125% of your home equity which you can use for debt consolidation or for added cash flow for other purposes. However, the lower the LTV/ CLTV, the less risk there is for lender loss should you default, which could result in the lender extending lowered interest and lower payments on your loan, which will make refinancing debt more affordable for you.