Homeowners can build equity by paying down their mortgage balance or waiting for their property to increase in value. The amount you owe on your mortgage compared with the market value of your home is known as the loan-to-value ratio. The higher your LTV ratio, the less equity you have. In turn, a low LTV allows you to get the best loan terms in a refinance. A homeowner might also need to calculate a combined loan-to-value, or CLTV, which means you have more than one loan on your property.
A CLTV mortgage refers to the indebtedness of having multiple loans on the same property, such as a first and second mortgage or a first mortgage with a HELOC.
Combined Loan-to-Value Mortgage Basics
A CLTV indicates secondary financing, such as home equity lines of credit (HELOCs), home equity loans or second mortgages, exists on a property. When two loans are used to buy a home, the indebtedness is referred to in terms of a CLTV. A CLTV also occurs when a homeowner takes out an additional loan or line of credit against his home's value, before he pays off his primary loan, or first mortgage.
Example CLTV Calculation
You can calculate your CLTV by adding your loan balances and dividing the sum by your home's value. For example, suppose a borrower owes $130,000 on his first mortgage and $15,000 on a HELOC for a total of $145,000. If the home's current market value is $229,000, the national median in 2019 according to Zillow, the mortgage CLTV is 63 percent.
CLTV and Risk
In general, an LTV of 80 percent or more is considered in the upper end of the risk range from a lender's standpoint. On such loans, lenders require the borrower to pay for private mortgage insurance -- an additional premium that protects the lender against default. To avoid private mortgage insurance, you may get two loans: one for 80 percent of the home's value and another for 20 percent of the value, for a CLTV of 100 percent.
Although high-CLTV financing became scarce after the mortgage crisis of 2007, borrowers can still get down payment assistance programs designed for low- to moderate-income borrowers.
Considerations for Secondary Financing
Homeowners often borrow against their property to pay off high-interest debt or tap into their home's equity. HELOCs and other secondary financing might make sense if the new loan has a lower interest rate compared with that of debts that will be repaid with the new loan.
Although taking on a secondary loan may reduce your immediate monthly payment, home equity debts can cost you more in the long run because they have repayment terms of 10 years or more. Additionally, having a higher CLTV might make it harder for you to sell or refinance your home. It is important to consider the effects of secondary financing before taking out a new loan.
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