Credit-Renting: A Practice Rattling the Mortgage Industry

Posted by Rana & filed under Home & Mortgage Refinance Information.

The new and growing practice of paying internet-based companies to repair a poor credit rating is being viewed with suspicion and concern by the feds and the mortgage industry. Federal regulators are keeping a close eye on this new trend, whereby online companies like (ICB) offer customers the opportunity to bump up their credit score by credit renting, including them as authorized users on the credit cards of consumers with perfect credit who, in turn, are compensated for accepting this piggybacking. In an effort to close this still relatively-obscure yet problematic mortgage loan loophole, Fair Isaac Corp., the creator of the extensively-utilized FICO score, announced that it will change its credit rating system later this year.

The trade organization representing lenders has aired its grievances before the Federal Trade Commission and is currently raising the issue with credit reporting bureaus, in the event that the scheme spreads any further and becomes more prevalent.

Lured by the internet’s low overhead costs and simplified marketing, more and more credit-boosting companies like Florida-based ICB are popping up on the world-wide web. In fact, ICB’s competitors are leaving no stone unturned: They are also targeting lending institutions, real estate agents and mortgage brokers in their electronic ad campaign.

ICB commands a fee of $900 for the first account on which a customer is added; for subsequent credit card accounts, charges are discounted. The cardholders authorizing the coat tailing on their credit history are paid between $100 and $150 per placement, depending on the credit limit age of the credit card; ICB cashes in the rest.

With a good credit score, consumers can benefit from huge savings since it typically translates into a lower mortgage interest rate. A higher credit rating can also enable them to qualify for a home loan. Ginny Ferguson, a credit expert representing the National Association of Mortgage Brokers and a mortgage broker in California, characterizes the new scheme as mortgage fraud, and the trade group is set to issue a policy statement condemning the practice. “These companies are encouraging consumers to commit fraud. On a standard home loan, there’s a clause that says the consumer is not omitting pertinent facts that could impact his or her ability to repay the loan,” Ferguson stated.

Lending institutions, who rely on credit ratings to determine a person’s loan repayment potential, are closely monitoring the credit-renting scheme’s expansion. They fear that the practice will adversely impact their efforts to diminish exposure to potentially-defaulting borrowers.

A vast majority (90%) of the largest U.S. lenders utilize FICO scores in deciding whether or not to issue loans, and their assessment presently takes into consideration authorized user accounts. However, following meetings with industry representatives and banks, Fair Isaac’s vice-president of credit rating solutions, Tom Quinn, stated that it would announce sometime this week that all upcoming versions of its FICO scoring system will exclude authorized user accounts. Although the change is not expected to be a quick-fix for banks seeking to abolish the credit-renting practice, it is a good start.

The change, however, will also affect consumers for whom authorized user accounts were initially intended, that is, spouses with little or without credit and college students who were added on their parents’ credit cards. This is unavoidable, since it is not feasible to separate this group of credit-worthy consumers from the group that is resorting to the credit-renting scheme to raise their scores. “As with any decision, there’s a trade-off,” Quinn explained. “The many honest consumers who learn good credit skills with the help from a family member, that feature will be removed. But the challenge for us is maintaining the integrity of the FICO score.”

Refinancing Applications Continue to Weaken

Posted by Rana & filed under General Debt & Loan Consolidation Information.

Consumers hoping for continued low mortgage rates were disappointed when Freddie Mac’s Primary Mortgage Market Survey recently revealed the opposite. On a brighter note, just one year ago rates moved into the high 6.80 percent range during the three month spring and summer period, but turned around and achieved a long-term run in the 6.06-6.20 percent range, which tells us that there is at least some hope that rates will become lower over time.

However, consumers are far more concerned with the present mortgage rate situation, which involves the 30-year fixed-rate mortgage moving up by 16 basis points to 6.37 percent! This percentage is the highest the 30-year fixed-rate mortgage has escalated since October 26, 2006. Additionally, it’s also the quickest one-week percentage movement in almost 18 months. Fortunately, fees and points remain stable at 0.4. Overall, this rate is still remarkably below the average, which was at 6.62 percent just one year ago.

Some FRM History

The 15-year FRM rose from 5.92 percent to 6.06 percent with fees and points at an unchanged 0.4. This represents the highest rate for the 15-year FRM since February 1st of this year. Just about one year ago, the 15-year rate was at 6.23 percent. A ten basis point increase from the past week, the five-year Treasury-indexed hybrid adjustable-rate mortgage or ARM averages at 6.02 percent, also the highest level since February with fees and points at 0.5. Last year, the five-year ARM averaged at 6.21 percent.

Vice President and Chief Economist, Frank Nothaft said, “Stronger than expected consumer confidence and recent comments from members of the Federal Reserve raised some inflation concerns in the market, causing it to lower expectations of a Federal rate cut this year. This helped push mortgage rates higher this week.” He added, “We expect a gradual rise in mortgage rates over the remainder of the year with sales slipping further in the second half of the year.” Nothaft also predicts a gradual recovery during the end of the 2007 year.

The Mortgage Bankers Association also reported higher interest rates and decreased overall mortgage application activity. In fact, the Weekly Mortgage Applications Survey for the week ending May 24 revealed an increase in the average contract interest rate for 30-year FRMs from 6.23 percent to 6.32 percent. The 15-year FRM increased from 5.96 percent to 6.05 percent including points increasing to 1.27 percent in comparison 1.24. On the other hand, the one-year ARM changed only slightly, increasing two basis points to 5.74 with fees and points going down from 1.1 to 1.09.

Consumer mortgage application activity also went down 7.3 percent from the prior week, yet up 17 percent in comparison to the same week just one year ago. As opposed to the previous week, mortgage refinancing activity also falls short, decreasing to 39.7 percent from 4.23. Moreover, the ARM decreased most of all at a mere 17.7 percent of all applications versus 18.1 percent just one week before.

Are Subprime Shockwave Fears Justified?

Posted by Rana & filed under Home & Mortgage Refinance Information.

The specter of the subprime mortgagesector upon the economy continues to dominate the news.  Many investors are worried about the effects on the economy of the downward spiral of these types of loans. Still the uncertainty has not produced a recession, but according to some analysts one may be on the horizon this summer.  Historically this sector of the mortgage business was 9 to 12 percent of the overall market.  For example, from years 1996 to 2000 subprime loans accounted of only 9 percent of the total loan origination market.  However, during the housing boom that percentage spiked to 21 percent of all loans between years 2004 to 2006.  In 2006, approximately 40 percent of interest-only and adjustable loan mortgages were classified as subprime mortgages. The defaults by mortgage customers persist and the corresponding free-fall in the subprime mortgage market continue to capture the public’s attention.  Many lenders have tightened their lending practices, compared to the facile loans doled out by them to borrowers in the boom time of the last few years.  In the mortgage industry, intermediaries buy mortgages and give funding to mortgage lenders.  These financial intermediaries are tightening their rein on mortgage lenders as they want to get rid of bad mortgage loans or avoid them all together.  Hence, many subprime mortgage lenders, are being asked to repurchase these untouchable mortgages, leading to subprime lenders ultimate financial demise.A good example of current industry momentum is the New Century Financial Corporation, a prominent subprime mortgage lender. The main concern lenders like New Century have is liquidity.  Its backers or creditors are attempting to keep New Century solvent; to stop the bleeding they have forced the company from making any new loans.  Also, New Century is under criminal investigation by the Department of Justice, and faces investigations in several states where the company is banned from new lending. To add to their woes, New Century’s shares have been delisted from the New York Stock Exchange.  New Century is one of many lender companies that are on the brink of insolvency; many have already crossed that threshold. The ability of subprime lenders to remain solvent in the near future will be an ever challenging endeavor, given that a hefty number of loans have been recently returned to them due to high default rates. This will only add pressure on the housing market, especially the lower priced spectrum of the market.  Therefore, it is not very difficult to portend these cycles of homeowner defaults and continued losses for the mortgage industry generating ripples of shockwaves throughout the economy leading to a major correction.

AmEx Brings Breakthrough Financing Approach

Posted by Rana & filed under Credit Card Debt Consolidation Information.

The average American mortgagor spends hundreds, if not thousands of dollars each month on a mortgage. Using a credit card to pay off a mortgage was an inconceivable and farfetched notion, until now. American Express has just ushered in a new concept that is bound to revolutionize the mortgage and credit card industries. It plans to give its cardholders who take out prime loans at select lenders, such as American Home Mortgage, the option of charging their mortgage payments on their credit cards, thus earning them reward points. American Express cardholders who utilize an American Express credit card to pay off their mortgage can expect to reap substantial annual cash rebates and earn a significant percentage back on future transactions.

This is a breakthrough and creative financing approach, considering that mortgage lending institutions typically would not accept credit cards. Furthermore, “card issuers would not encourage [the charging of mortgage payments] since this is in most cases a major red flag that the customer is in financial trouble,” explained Robert McKinley, chief executive and president of

Still, American Express (Fortune 500, Charts) is exercising prudence and not taking a gamble, since it is restricting its offer to cardholding clients that it pre-screens prior to enrollment and thereafter conducts periodic checks on prior to charging a mortgage payment.

To avail themselves of this new service, American Express customers will have to meet the criteria for a refinance prime loan or a prime loan for a new home purchase- which is usually extended to those with good credit – as compared to subprime loans whose target is home purchasers with poor credit.

In this new venture, American Express has thus far teamed-up with one company – American Home Mortgage. However, more partnerships with other lenders are in the planning stage and will soon be announced, indicated company spokeswoman Christine Elliott.

Mary Feder, a vice-president for American Home Mortgage, explained that eligible prime-loan mortgagors can choose from a number of adjustable-rate or fixed rate mortgage loans that do not surpass $1 million. Government loans, option ARMS, low- and no-documentation loans, and high loan-to-value mortgages are not covered under the program.

To determine an applicant’s eligibility for a prime loan, American Home Mortgage considers a number of factors, including 1) the borrower’s debt-to-income relationship, 2) the amount of the borrower’s down payment, 3) the borrower’s cash reserves, and 4) the borrower’s credit score.

At closing, eligible mortgagors will be required to pay $395 to the lending institution. Each month, there is an automatic mortgage payment charge. This enables borrowers to earn American Express reward points much faster, by virtue of the fact that mortgage payments usually comprise of a consumer’s largest monthly expense and ensures that the lender is paid timely.

American Express’ novel offer holds much promise for borrowers who have a history of paying their credit card bills and making their mortgage payments on time each month.

However, for consumers who face the prospect of insufficient and late payments on their card, the picture is not so rosy. Failure to pay a credit card bill on time subjects borrowers to late fees and can adversely impact their credit score, which in return can result in the imposition of a penalty interest rate.

New Bill Guarantees Fairness to Credit Card Holders

Posted by Rana & filed under Credit Card Debt Consolidation Information.

In 2005, Americans holding an average of 5 credit cards per household utilized almost 700 million credit cards to purchase products and services totaling $1.8 trillion. To protect consumers from abusive and unfair credit card practices and ensure arms-length treatment by credit card companies, Senators Claire McCaskill (D- MO) and Carl Levin (D-MI) introduced this month the “Stop Unfair Practices in Credit Cards Act”, a broad bill that was immediately hailed by national consumer groups.

Among those who applauded the move was Travis B. Plunkett, Plunkett, the Consumer Federation of America’s Legislative Director, who stated that the groundbreaking legislation “will stop credit card companies from using a variety of traps and tricks that harm consumers and illegitimately pump up profits”. Norma P. Garcia, an attorney for the Consumers Union, echoed this sentiment by holding that, absent these reforms, “consumers are helpless to defend themselves against currently legal but abusive credit card practices that trap consumers into spiraling debt.”

The Stop Unfair Practices in Credit Cards Act contains numerous sections aimed at curbing or banning lending abuses on the part of credit card companies. The bill’s most significant provisions are as follows:

1. Interest rate increases would only be applied to future debt:

The bill would make interest rate hikes applicable solely to credit card debt incurred in the future. Credit card companies would be prohibited from charging the higher interest rate on debt incurred before the rate increase took effect.

2. Outrageous, non-consensual hikes in interest rates would be prohibited:

Pursuant to the bill, credit card issuers would be prohibited from unilaterally raising the interest rates of card holders who comply with the terms of their credit card contract. Credit card companies will also be subject to a 7% cap on penalty interest rate increases if the card holder fails, for example, to make a timely payment.

3. Over-the-limit fees would be restricted:

A card issuer who grants a credit extension permitting the consumer to surpass the card’s credit limit will be allowed to impose only one over-the-limit fee. The credit card company would be authorized to impose the fee only if the balance exceeds the credit limit at the termination of the billing cycle. Furthermore, such a fee can only be imposed if an action on the part of the consumer, not by the credit card company, caused the credit to go beyond the established limit.

4. Unfair practices relating to fees would be targeted:

The bill would prohibit credit card companies from charging customers interest on fees imposed on them and fees for bill payment.

5. Interest charges for debt paid timely and in full would be prohibited:

Issuers would be prohibited from charging interest on debt that a card holder paid in full and on time.

6. Currency exchange fees would be regulated:

The new legislation will require credit card companies to charge a foreign currency exchange fee that is proportional to the cost involved in performing the currency exchange.

7. Credit card payments would have to be handled equitably:

Issuers will be required to first apply credit card payments towards the balance with the highest interest rate and then proceed to balances with the next highest rate. This will ensure that interest charges or fees are imposed only when strictly necessary.

8. Data collection would be enhanced:

Credit card data gathering efforts will be improved under the new bill.

Considering the detrimental effect of credit card abuse on American households and the overall economy, Congress should enact this pro-consumer bill which will undeniably make it an even-playing field that benefits all honest players.

WaMu Mortgage Plus: An All-In-One Package

Posted by Rana & filed under Home & Mortgage Refinance Information.

Washington Mutual recently unveiled WaMu Mortgage Plus, an “all-in-one” loan package combining a home equity line of credit and new mortgage that offers consumers the opportunity to alternate between adjustable and fixed rates twice annually and to reset interest rates without refinancing. Customers can utilize a WaMu Mortgage Plus as their principal mortgage and eliminate any existing mortgage debt they have.

This new Washington Mutual mortgage product, which was introduced in mid-March and is now the subject of a national marketing campaign, is aimed at helping clients capitalize on market conditions and changing personal financial needs without being burdened with high fees and a load of refinancing paperwork.

Washington Mutual’s Chief Operating Officer and President Steve Rotella explained that Mortgage Plus was conceived “with an eye toward what we think is a very large group of customers … looking for more control and flexibility”.

The first reset of a home equity-mortgage loan is free of charge; subsequent resets cost $250 each. There is no charge for changing from a fixed rate to an adjustable rate; the former usually deemed the more secure option.

Although home buyers are expected to make a 10% down payment, Washington Mutual does not require payment of such costs as origination, title and appraisal fees that borrowers commonly pay. Once home buyers start paying down the principal on their WaMu Mortgage Plus, they will be entitled to tap into the equity they built by using a cash advance, a check, or in the majority of states, a credit card. With each mortgage payment they make, customers will see their line of credit growing.

Rotella considers that this easier method for borrowers to obtain cash for such expenditures as college tuition and home renovation projects will enable Washington Mutual to retain a loyal clientele that is reluctant to refinance with another creditor. He stated that even though other lending institutions provide similar products, Washington Mutual “will grab market share” since its competitors do not offer these very same features in “an all-in-one package”.

Jim Bradshaw, an analyst with D.A. Davidson, agreed, adding that as long as WaMu Mortgage Plus remains price-competitive, Washington Mutual will likely draw many new consumers who find this “all-in-one” loan idea to be convenient and flexible. Bradshaw reasoned that borrowers have become more sophisticated: “If they think rates are going to go down, they’re going to swap into a variable. If they think home loan rates are going to go up, they’re going to swap into a fixed.”

Having succeeded in keeping tight reins over its subprime business, Washington Mutual now has high hopes for its WaMu Mortgage Plus product, which it believes will generate profits for its home loan unit. The bank’s home loan section also foresees a healthier economy and a more robust prime lending market. Rotella explained as follows:

“As the home loans organization continues to improve, this is just going to accelerate the momentum we believe we’re building in that business.” As it stands now, Washington Mutual is apparently very much pleased with the results. “It’s been above our early expectations by a fair amount,” confirmed Rotella.

Home Equity Loan Points and Fees

Posted by Rana & filed under Home & Mortgage Refinance Information.

A home equity loan is an excellent resource for obtaining funds when you really need it. Because you are not always equipped to handle financial situations that come your way, especially when they are unexpected, a home equity loan can provide you with the financial support you require in times of need. Home equity loans are specifically used to finance large expenses such as renovations on your home, university tuition and fees, medical bills or debt consolidation.

Additional benefits of a home equity loan include tax deductible rates and a lower monthly payment amount. If you are considering the possibility of applying for a home equity loan, you need to do your research carefully and be aware of all the costs associated with your loan.

Home Equity Loans: Associated Points, Fees and Rates

Every home equity loan lender’s costs will vary, which is why it’s important for you to find a reputable company that has a proven track record and will offer you competitive rates. If you’re a first time home equity loan borrower, you may not be familiar with all the costs associated with your loan. These include home equity loan points, fees and interest rates.

There are generally two types of home equity loan points you can pay. The points paid upfront at the closing of your loan which are used to decrease interest rates are known as discount points. The way it typically works is that one point is equivalent to one percent of the total amount of your loan. The other type is called origination points. These are the home equity loan points you pay for services provided by your lender through out the loan process. Other related home equity loan costs include application fees, appraisal fees, closing costs, legal fees, and insurance.

Home equity loan rates vary significantly from company to company and tend to change daily. If you find a lender who offers you a satisfactory rate, make sure you lock it in with the lender so it doesn’t change before making a commitment. Some of the rates you should be aware of include:

The APR represents the amount for all the costs associated with your home equity loan interest rate. Fixed interest rates remain the same for the duration of your home equity loan. While fixed rates are slightly higher in the beginning, they offer steady monthly payments that will not change over the life of your loan. Adjustable interest rates change over the period of your home equity loan and although they may be lower than fixed interest rates in the beginning, they can be higher during your home equity loan repayment period.

Home Equity Loan Companies

Because the interest rates on your home equity loan tend to be a little higher than your first mortgage loan, it’s important to shop around for the right home equity loan lender/company to represent you. This doesn’t mean you can’t negotiate a lower rate on your home equity loan; however you do have to do your research. You can start by checking with your current mortgage company to see if you are eligible for a home equity loan with them. The foundation you have laid and relationship you have already built with them can help you to lock in a lower interest rate. You can also attain quotes from several different loan companies to ensure you get the best deal possible on your home equity loan.

Finding the Best Home Equity Loan Rate

Posted by Rana & filed under Home & Mortgage Refinance Information.

If you have decided to take out a home equity loan, but are not sure which lender/company to go with, you’re not alone! After all, these days virtually every type of financial institution is offering consumers home equity loan options. The up side is that you have choices when it comes to your home equity loan. However, you still have the task of finding the best home equity loan rate, not to mention one that will suit your individual needs.

Search for Home Equity Loan Rates Online

The Internet is a great resource for finding a home equity loan company that offers competitive mortgage rates. Searching for the best home equity loan rate is not something you can spend a couple of minutes on and call it a day. While it does take time and sufficient research, the amount of money you are able to save makes it all worthwhile.

You can start by searching for companies and lenders online that specialize in home equity loans such as You should be able to find plenty of information concerning home equity loan options and any special offers or programs that these companies and others are offering to borrowers.

Fixed Home Equity Loan Interest Rates

Home equity loan companies typically offer either fixed or adjustable interest rates. So how do you know which one is right for you? You have to consider the pros and cons of both and come to a decision based on which home equity loan rate will work best for you.

While an adjustable interest rate may seem like the better deal initially, you have to think about payment on your home equity loan on a long-term basis. It’s important to remember that adjustable rates will constantly change according to economic factors so you will experience interest rate fluctuations. This translates into not knowing exactly how much you will owe down the road which is undoubtedly an unsettling thought. With a fixed home equity loan rate, you don’t have to worry about unpredictable interest rates as they will be consistent for the entire duration of your loan.

Home Equity Loan/Rate Advantages

Home equity loans can help you cover the costs associated with some of life’s larger expenses. A couple of the ways you can use a home equity loan include:

Debt consolidation or consolidating your bills to pay off debts from credit cards, student loans etc. Finance home renovations (updates and additions), which in turn increases the value of your property Funding for college tuition and other associated school fees for yourself or a member of your family (especially for large families) Money for a vacation

In addition to the financial support a home equity loan can provide you with, the interest you are charged on your loan is also tax deductible, which is a huge benefit and one that you can take advantage of at the end of the year.

Finding the best home equity loan rate isn’t always easy, but it is possible. Lower rates are out there, you just have to know how and where to search for them. Make sure the home equity loan lenders/companies you look for are reputable and have a consistent track record among borrowers. Also, look for fixed interest rate options as well as rates that are tax deductible.

Compare Home Equity Loan Options

Posted by Rana & filed under Home & Mortgage Refinance Information.

A home equity loan is a type of loan that you as a home owner can take out by putting up the equity in your home as collateral. A home equity loan is also a secured debt as it is essentially debt against your own property, which you have ownership of. If you require a substantial sum of money in a large amount, then you may want to consider applying for a home equity loan.

Home Equity Loans Can Help With Expenses

A home equity loan can be of great assistance to you when it comes to covering large expenses. Some of the ways you can use a home equity loan include:

Pay off your debts – If you are currently burdened with a huge amount of debt stemming from credit cards, car and student loans etc., then a home equity loan can help to consolidate all of your debts into one loan. This will also allow you to have one monthly payment amount instead of several different ones. While debt consolidation doesn’t eliminate the total amount you owe, it does make your finances more manageable. Cover unexpected medical bills – It’s hard to financially plan for unforeseen emergencies, especially when they’re health related. Having savings set aside is a great backup plan, however if you’re having a hard a time making ends-meet as it is, it’s not possible to set aside extra funds incase of medical emergencies. A home equity loan can help you handle medical related expenses, should they come up unexpectedly. Home renovations – If you want to remodel your home or make some additions to it but don’t have access to sufficient funds to make it happen, you can apply for a home equity loan to finance the home improvements. Updating your home can make the value of your property rise substantially, which will come in handy if and when you decide to sell it. College education – Financing college is a huge commitment and it’s also really tough if you have a large family. A home equity loan can help finance a member of your family’s college education or pay off their student loan. As the saying goes, “a mind is a terrible thing to waste!” Family Vacation – Who couldn’t use a vacation after working hard all year? Isn’t there always such a great deal on vacations/cruises when you don’t have access to money and when you actually do, the prices are through the roof! You don’t have to pay through your nose for a vacation. If there’s a good deal and you want to take advantage of it but don’t have the cash upfront, you can always opt for a home equity loan and finally go on that dream vacation with your family.

Home Equity Loan vs. Home Equity Line of Credit

You may be wondering what the difference between a home equity loan and a home equity line of credit is. A home equity loan is a one time lump sump loan based on the equity of your home. Once you have paid it off, you won’t have access to that loan again. A home equity line of credit on the other hand, is a loan that is fixed for a certain amount. You have access to the entire line of credit even when your outstanding balance is zero.

Interest Rates and Tax Benefits

Your home equity loan can be taken out on either a fixed or adjustable interest rate. When you take out your home equity loan on a fixed rate, the interest rate remains the same for the entire period of your loan. Adjustable rates are not fixed and therefore vary based on specific factors. An added benefit of a home equity loan is the fact that the rate charged on the loan is generally tax deductible, which always works to your advance come the end of the year.

Understanding the Concept of Loan-To-Value (LTV) Ratio

Posted by Rana & filed under Home & Mortgage Refinance Information.

One of the criteria that mortgage lenders take into account before approving a mortgage is the loan-to-value ratio (LTV). The LTV is defined as the relationship, in percentage form, of the amount of money loaned by a bank to the value of the collateral pledged as security for the loan. For instance, a $66,000 loan on a $100,000 home would have a loan-to-value ratio of 66 percent. Either the appraised value or the sale price, whichever is lower, is the property value referred to in calculating the loan-to-value.

The reason why loan-to-value is of such importance to lenders who are qualifying individuals for a mortgage is because of the risk of default. The lower the equity, the more likely that a lender will have to absorb a loss in a foreclosure proceeding. Loan-to-value indicates to the lender whether potential losses resulting from default may be recovered by selling the asset.

The higher the loan-to-value ratio, the more stringent the qualification guidelines for certain mortgage programs. Borrowers of high loan-to-value loans (an LTV higher than 89%) might be required to purchase mortgage insurance to protect lenders against default, which raises the costs of the mortgage.

The bank’s acceptable loan-to-value ratio will depend on the type of collateral offered as security for the loan. The loan-to-value ratio can change from one lender to the next, and it may also be subject to other lending criteria. For example, a healthy cash flow on the part of the borrower may lead to more flexibility on the part of the lender vis-à-vis the loan-to-value ratio.

Community banks will typically offer the following LTV ratios for the different collateral listed below:

1. Real estate: Property that is occupied will yield up to 75 percent of the appraised value. If the real estate is improved, but not occupied, borrowers can expect up to 50 percent. For vacant and unimproved land, borrowers could receive 30 percent.

2. Inventory: For ready-to-go retail inventory, lenders may offer up to 60-80 percent of the appraised value. By contrast, the component parts and other unfinished goods that constitute a manufacturer’s inventory might yield only 30 percent. The defining element here is the inventory’s merchantability, namely, how rapidly and for how much the inventory could be sold.

3. Accounts receivable: The older the account, the lesser its value. Other elements potentially impacting the loan-to-value ratio are the account debtor’s creditworthiness and delinquencies in the accounts.

4. Equipment: For new equipment, banks might advance 75% of the purchase price, whereas used equipment will likely yield a smaller percentage of the liquidation value.

5. Securities: Borrowers can obtain up to 75 percent of the market value for stocks and bonds used as collateral. However, they cannot utilize the loan proceeds to buy additional stock.

In sum, equity is a function of the LTV ratio. Understanding the loan-to-value concept is crucial for borrowers since lenders prefer a borrower to have as much equity as possible. Equity also determines how much a bank will allow you to refinance your property for and how much it will lend you for a second mortgage.