Grasp the concept of Combined Loan-to-Value (CLTV) in home loans, a key metric in real estate finance that assesses risk by evaluating all mortgage debts.
The Combined Loan-to-Value (CLTV) ratio is a financial metric used in the lending industry to evaluate the risk of lending money for a mortgage based on the total mortgage debts secured by a property compared to its appraised value. It is particularly relevant when a borrower takes out more than one loan on the same property, such as a primary mortgage combined with a home equity loan or line of credit.
CLTV is calculated by adding the outstanding loan amounts of all loans secured by the property and dividing that total by the property's current market value. The formula can be expressed as:
The formula can be expressed as:
CLTV = ( Primary Mortgage Balance + Secondary Loan Balance(s) ) x 100
Appraised Property Value
Understanding one's CLTV ratio is important for managing property equity and financing decisions, especially for homeowners considering refinancing or taking out additional loans against their home's value.
A good CLTV ratio for obtaining a home equity loan typically varies by lender, but many lenders prefer a CLTV of 85% or lower. This means the combined balance of your primary mortgage and home equity loan should not exceed 85% of your home's value. Lower CLTV ratios may qualify you for better rates and terms.
Yes, improving your home's value can positively affect your CLTV ratio by increasing the denominator in the CLTV calculation. This can happen through home improvements or market value increases. A higher home value lowers your CLTV ratio, allowing for better refinancing options or the ability to take out a home equity line of credit (HELOC) under more favorable conditions.
A decrease in your property's market value can increase your CLTV ratio, as it reduces the property's appraised value used in the denominator of the CLTV calculation. This can lead to a higher perceived lending risk and may affect your ability to refinance or obtain additional financing. Sometimes, it may also require you to pay for private mortgage insurance (PMI) if the CLTV ratio exceeds the lender's threshold.
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