Question
In: Finance
Most banks will charge a ___ interest rate on a $160,000 purchase loan with $200,000 purchase...
Most banks will charge a ___ interest rate on a $160,000 purchase loan with $200,000 purchase price and appraised value than on a $160,000 refinance loan remaining principle on old loan $120,000, with $200,000 appraised value
A. Lower
B. Higher
Solutions
Expert Solution
Answer : B. Higher
The loan-to-value (LTV) ratio is an assessment of lending risk before a mortgage loan is approved. Loans with high LTV ratios are considered as higher risk loans and will be charged a higher interest rate.
The lower the LTV ratio, the lower the interest rate will be. As the LTV ratio increases, the interest on the loan rises.
MA = Mortgage amount
AV = Appraisal value
Case 1
= 80 percent
Case 2
= 60 percent
The interest rate may be higher for Case 1 loan since the LTV is 80% than the interest rate for loan with an LTV ratio of 60%.
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