The Importance of Understanding Your Combined Loan-to-Value Ratio: A Guide for Homeowners
If you're a homeowner, understanding your combined loan-to-value (CLTV) ratio is crucial. This ratio compares the total debt you owe on your home to its current market value, including your primary mortgage and any other secured loans. A low CLTV ratio is beneficial as it indicates a lower risk of missed payments or foreclosure, making it easier for you to qualify for a second mortgage or other loans. In this article, we'll explore what CLTV is, how it differs from other ratios, why it matters, how to calculate it, and what you can do if your CLTV is high.
What is Combined Loan-to-Value (CLTV) Ratio? Your CLTV ratio is a measure of the total debt you owe on your home compared to its value. This includes your primary mortgage and any other loans secured by your property. A lower CLTV ratio is better because it shows lenders that you're less of a risk for missed payments or foreclosure. When you apply for a second loan against your home, such as a home equity loan (HEL) or home equity line of credit (HELOC), the amount you plan to borrow is included in your CLTV ratio along with your original mortgage. If your CLTV is too high—typically anything above 85% for most lenders—your application can be denied.
CLTV Ratio vs. LTV Ratio Loan-to-value (LTV) ratios and CLTV ratios are similar in that they both compare the amount of debt you owe on your home to its value. The difference is that LTV refers specifically to your primary mortgage loan. For instance, if you have a 3% down payment, your LTV ratio on closing day is 97%. However, when applying for a second loan on the home, the lender will use the "combined" ratio to include both loans—your outstanding primary mortgage balance and the amount you plan to borrow with the second mortgage.
Why Does CLTV Matter? For loans that use your home as collateral, your CLTV ratio impacts both your chance of being approved and your interest rate. If your ratio is too high, you could face any of the following outcomes:
- High annual percentage rate (APR): You might be approved for a second mortgage but be charged a higher APR, which includes both your interest rate and annual fees. The higher your rate, the higher your monthly loan payments and the overall borrowing cost.
- Denied loan approval: The mortgage lender could deny your loan application if you don't have enough home equity.
How to Calculate CLTV Calculating your CLTV ratio involves several steps:
- Add up the total balance you owe on all loans against your home, including your primary mortgage, any home equity loans or lines of credit, and any new loan you're applying for.
- The lender will usually require a professional appraisal to determine the current market value of your home. You can make an informed estimate by looking at recently sold homes in your area and multiplying the average price per square foot by the square footage of your home.
- Divide
