Mortgage Loan To Value | Its Importance And Why
Welcome to yet another tip from sell my mortgage note for cash. What exactly is the Mortgage Loan to Value and why is it important?
Today we are going to discuss one of those acronyms in the Mortgage Note world that sometimes people get confused about. Truth be told, it’s quite simple to understand really and if you’re going to get involved in mortgage notes in any way, it’s very important you understand this concept.
So today we are going to be talking about Mortgage Note Safety and the mortgage note’s loan to value ratio… aka LTV.
Simply put… a low loan-to-value ratio makes your note safer and increases its resale value.
But what exactly is the loan-to-value ratio…aka LTV?
The loan-to-value ratio for your note is the sum of the current loan balance(s) for your loan and all senior loans divided by the current market value of the property securing the note.
Here are 2 scenarios.
(Scenario 1)
Loan Amount – 1st Lien Position = $100,000
Loan Amount – 2nd Lien Position = $0 (n/a)
Market Value of Property = $200,000
Loan to Value Ratio = 50% (100,000 / 200,000)
(Scenario 2)
Loan Amount – 1st Lien Position = $100,000
Loan Amount – 2nd Lien Position = $44,000
Market Value of Property = $200,000
Loan to Value Ratio = 72% (144,000 / 200,000)
In general… the lower your LTV, the more valuable your note.
Why?
Simple… the lower the LTV the more equity there is in the property. Equity is simply defined as the difference between the market value of the home and the loans against it.
For example, let’s assume the home is worth $100,000 and there are 2 mortgages against the house equaling $65,000. In this case, the equity is simply $35,000 which is the difference between $100,000 and $65,000.
With $35,000 in equity, investing in this mortgage note is way safer than investing in one that only has $5,000 in equity.
Assume the home is worth $100,000 but this time the mortgages against the property equal $95,000. In that scenario, there is only $5,000 of equity which means… if someone buys this note, there is only a $5,000 cushion in the home’s value before the amount owed against the home is more than the home’s value itself.
That’s a scary situation for mortgage note investors because home values can easily fluctuate $5,000 but it’s harder for them to drop $35,000 in value. As such, the note against the home with $35,000 in equity is a way safer mortgage note investment than the one with only $5,000 in equity.
In LTV terms, the safer investment discussed above has an LTV of 65% as opposed to the more risky mortgage note LTV of 95%.
In summary, the LTV of your note and deed of trust on the property (first position, second position, etc.) is critical to the note’s value. The lower the LTV the more attractive of a mortgage note you have.
Thank you for reading and I hope this explains Loan to Value a little better. Be on the look out for my next tip here at Sell My Mortgage Note for Cash.
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