Detailed Definition
A high loan-to-value (LTV) loan allows borrowers to secure more financing than the actual market value of their property, with the loan often covering up to 125% of the home’s value. These loans are used primarily for refinancing existing mortgages, and essentially function as home equity loans that provide the borrower with additional cash beyond the remaining mortgage balance.
Since high LTV loans involve lending more than the property is worth, these loans carry a higher risk. As a result, they are generally approved for borrowers who demonstrate exceptionally low credit risk. Lenders offering high LTV loans are betting on the borrower’s reasonable aversion to foreclosure, since a portion of these loans remain unsecured by tangible property.
Examples
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The Dawsons’ Refinancing Case: The Dawsons had an outstanding mortgage of $90,000 on their property, which had a market value of $100,000. They refinanced their mortgage and obtained a high loan-to-value loan amounting to $125,000. This refinancing not only covered the original mortgage but also provided them with $35,000 (minus transaction costs) for home remodeling and debt repayment.
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Investment for Upgrades: Carla’s home is valued at $200,000, but she needed additional funds for home improvement projects totaling $50,000. She was able to refinance her original loan, receiving a high LTV loan of $250,000, which allowed her to fully pay off her original mortgage and complete the needed upgrades.
Frequently Asked Questions (FAQs)
1. What is a high loan-to-value loan?
A high LTV loan is a type of refinancing loan that allows borrowers to secure financing exceeding the market value of their home, typically up to 125%.
2. Who is eligible for a high LTV loan?
High LTV loans are generally reserved for borrowers with low credit risk. Lenders look for borrowers with strong credit scores, stable income, and a good repayment history.
3. Why are high LTV loans considered high-risk?
Since the loan amount exceeds the property’s market value, lenders take on heightened risk. Should the borrower default, the property sale may not cover the total loan balance, leaving a portion of the loan unsecured.
4. What purposes can the additional funds from a high LTV loan be used for?
Borrowers often use the additional funds for home improvements, debt consolidation, or other significant expenditures.
5. How does a high LTV loan differ from a standard mortgage?
A standard mortgage typically covers up to 80% of the property’s market value, whereas a high LTV loan covers more than 100% of the value, often up to 125%.
Related Terms
- Loan-to-Value Ratio (LTV): The ratio of a loan amount to the appraised value of the property it secures.
- Refinancing: The process of obtaining a new loan to replace an existing one, usually to secure better terms.
- Home Equity Loan: A loan in which the borrower uses the equity of their home as collateral.
- Unsecured Loan: A loan not backed by an underlying asset such as property.
Online Resources
- Investopedia: Loan-to-Value Ratio (LTV)
- NerdWallet: What is a Home Equity Loan?
- The Balance: Understanding Home Equity Loans and Refinancing Options
References
- “Investopedia,” Loan-to-Value Ratio (LTV). Available at Investopedia.
- “NerdWallet,” What is a Home Equity Loan?. Available at NerdWallet.
- “The Balance,” Understanding Home Equity Loans and Refinancing Options. Available at The Balance.
Suggested Books for Further Studies
- “Home Equity Loan: A Guide for Real Estate Investors” by Adam Rispoli
- “Refinancing Real Estate: How to Refinance and Get the Best Lending Deals” by Ken Strong
- “Mortgage Management for Dummies” by Eric Goldman
