| These days many renters are taking advantage of | | | | shorten the term of the mortgage loan. |
| the present low level of interest rates to get into a | | | | It is fairly easy to calculate the loan to mortgage ratio. It |
| home of their own. In addition, many current | | | | simply requires knowing approximately how much your |
| homeowners are taking advantage of those same | | | | home is worth, the amount of the outstanding |
| low interest rates to refinance their home mortgage | | | | mortgage and the amount of the original down |
| loans at more favorable interest rates. | | | | payment. For our exercise we will use a home value |
| Therefore, whether you are a current renter moving | | | | of $150,000. The approximate value of your home can |
| into a home of your own or a long time homeowner | | | | be estimated by looking at what similar homes in your |
| seeking a lower interest rate, it is important to | | | | neighborhood have sold for. |
| understand one of the most important financial | | | | When calculating the loan to value ratio, the first step is |
| formulas - the loan to value ratio. | | | | to take the original purchase price of the home, in this |
| The easiest way to understand the loan to value ratio | | | | case $150,000 and subtract out the amount of the |
| is that it represents the relationship between the | | | | original down payment. For this exercise we will use a |
| amount of the outstanding mortgage as compared to | | | | down payment of $20,000. |
| the current value of the home. Since housing prices | | | | The loan to value ratio is calculated by subtracting the |
| have been rising very fast in many areas of the | | | | $20,000 down payment from the purchase price of |
| country, many current homeowners have built up quite | | | | $150,000. In this case the resulting number is $130,000, |
| a bit of equity in their homes. | | | | which represents the $150,000 purchase price minus |
| Many homeowners, for instance, find themselves in the | | | | the $20,000 down payment. Dividing the $130,000 loan |
| happy circumstance of owning a home that is worth | | | | amount by the $150,000 purchase price gives us a loan |
| substantially more than they paid for it, or substantially | | | | to value ratio of 0.87, or 87%. |
| more than they owe on it. This means that the | | | | It is important to know your loan to value ratio, since |
| homeowner has equity that can be used to borrow | | | | this number will be important to lenders any time you |
| additional funds, refinance the mortgage or even | | | | apply for a loan. |