What is the difference between Loan-to-Value (LTV) and Combined Loan-to-Value (CLTV) and why does it matter? To understand these terms and their relevance, I offer the following example related to a home purchase:
Example:
- Purchase Price - $100,000
- 1st Mortgage - $80,000
- 2nd Mortgage - $10,000
In the above example, we have 2 different terms to clarify:
- Loan-to-Value (LTV) - which is calculated by dividing the 1st Mortgage amount by THE LESSOR OF the Purchase Price or Appraised Value (for now, let's assume both the Purchase Price & Appraised Value are identical for simplicity purposes)
- Combined-Loan-to-Value (CLTV) - which is calculated by ADDING ALL LIENS, then dividing by THE LESSOR OF the Purchase Price or Appraised Value (again, we'll assume those numbers are identical for simplicity)
Now that we know the terminology & calculation methodology, we can apply the actual numbers to the above referenced example.
- LTV = 80% ($80,000 divided by $100,000 = 80%)
- CLTV = 90% ($80,000 + $10,000 = $90,000, $90,000 divided by $100,000 = 90%)
When a 1st Mortgage & 2nd Mortgage are obtained concurrently (at the same time), it is often referred to as a piggy-back mortgage and/or the 2nd mortgage is referred to as subordinate financing. There are different goals which may be accomplished with regards to these strategies, which I am happy to elaborate if/when desired. Please feel free to contact me for more details on all mortgage loans, including the difference between LTV and CLTV.
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