Understand high LTV mortgage options

Have only 5, 10 or 15% down payment? What are my available loan options? Should I opt for mortgage insurance or higher interest rate or HELOC? Proceed to find answers.

In this market where interest rates as well as property prices are rising constantly, it is imperative that one chooses right mortgage. Although there can be multiple right or wrong answers while making a financial decision, in this illustration, I will try to help borrowers understand the options so that you can make an informed decision.

First, let’s understand some key terms/ concepts you need to be aware of while making these choices.

1. LTV — Loan to value means what is the percentage of loan borrower is obtaining as compared to property’s appraised value (or purchase price, lower of the two). LTV determines the lender’s risk in the transaction, hence higher the LTV, risky the loan for lender and thereby typically they would like higher interest rate or Mortgage Insurance (MI) to cover the risk/ cost of risk.

2. MI — Mortgage Insurance is a payment Borrower makes as part of Mortgage payment to reduce lenders risk by covering part of the loss in case a borrower defaults on a loan. Typically paid by borrower monthly or one time upfront. Doesn’t benefit borrower directly by any means other than it may be tax deductible. If it is paid by lender, typically lender gets compensated by higher interest rate or higher closing costs for the loan.

3. HELOC — Home Equity Line of Credit. Typically, a second loan on a property where it gives additional money to the borrower but doesn’t impact the first loan pricing as much. First mortgage lender’s risk is only up to the LTV applicable for first loan. HELOC lender gets compensated by charging higher interest rate on the loan though. For our illustration, we will consider HELOC amortization term to be 15 years, rate @6.75% (1.99% above prime)

Now let’s understand few widely available options for the following loan scenario.

Property Purchase Price (or Appraised value): $750,000

Interest Rate: 4.125%

Down Payment: $75,000 (10%)

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Please do share your thoughts in comments on these options and my assessment of these options. Also, share if it is helpful information or any other feedback to help me make next one better. If you need help in assessing your available Mortgage options or have suggestions for more topics I can cover, please leave a comment here or write to financingbuddy@gmail.com.

Thank you for your time!! Best wishes.

PS: I am not a loan officer and do not represent any lender, so don’t worry about any sales calls :)

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