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Mortgage Insurance
As alluded to before, another important thing to take note of as it concerns to LTV is the effect which it has on mortgage insurance. If your loan to value is greater than 80%, you will have to pay mortgage insurance, until which time the balance of your loan dips below 80% LTV… but it is notorious for being frustratingly difficult to get rid of even then. Mortgage insurance can often be rather costly, and most borrowers much prefer to find ways to avoid having to pay it.
One of the most popular ways of avoiding mortgage insurance but still having a high loan to value is by taking out a second mortgage. Second mortgages will always have much lower balances, but much higher rates. Because of this, it is often advisable to refinance or otherwise find a way to pay off a second mortgage as soon as you can, to release yourself from the obligation as quickly as possible.
Some of you more savvy readers may at this point wonder, “Hmm… if I can get 80% for a first mortgage, and 20% for the second… why would anyone ever pay a down payment?” The answer to this is simple: the limitation of most lenders in only lending out up to 90% to 95% applies to the combined loan-to-value (CLTV) of the first and second collectively.
Because of this, the most popular way for borrowers to get a home without paying mortgage insurance is called informally the 80/10/10 plan. In this, you take out an 80% first mortgage, “piggy-back” on a 10% second mortgage, and pay 10% down towards your home. Naturally, this can be adapted to an 80/15/5 set up, should one be able to find a lender willing to go up to 95% loan-to-value.