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What is Loan to Value?

It is the percentage ratio of the balance of your loan compared to the value of your home. The purpose of course for measuring loan to value, is measuring the equity you have in your home.

For example, if you put 20% down, you have an 80 percent loan to value, and then of course a 20 percent equity portion. However, if you put 5% down, remember there is mortgage insurance on top of the loan, which means there is only maybe 2 percent equity on day 1.

I want to leave you with 3 solid tips if you are putting 5 percent down, I think it’s really important to protect yourself against the possibility of negative equity, or being sort of boxed into your home. The first, I want you to consider the length of time you plan to stay in this home. I know this is often tough to do, but I think it’s really really important. If I’m putting 5 percent down, I have to make sure that I’m going to stay in here long enough, that I can build the equity up so that when I sell down the road and have to pay my selling costs, such as realty commissions etc. that I have enough equity for that.

Second, be very careful to be caught in competitive offer situations. I know we emotionally get attached to the idea of buying a specific home, and then if there are competitive offers, often that can artificially raise the price of the home, and then you may be starting actually in a negative equity position several months into your mortgage.

And the final one, if you’re putting 5percent down, then the importance of a mortgage strategy that is designed to quickly pay down the principal of your mortgage and increase the equity position, is critical.

Thanks for watching.

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