Thursday, July 20, 2006

Mortgage Investing and Loan to Value Ratio

One thing you need to understand before investing in a mortgage is the loan to value ratio. This may sound technical, but it is terribly easy. It is the ratio of the loan on the mortgage compared to the value of the mortgage - this is done by dividing the loan by the value.

Let's look at a quick example. If you loan $70,000 on a $100,000 house, your loan to value (LTV) is 70%. If you only loaned $50,000 then your LTV would be 50%. The lower your LTV, the safer your investment.

Most successful private mortgage investors do not loan out more than a 70% LTV. Additionally, they do NOT loan out on a second mortgage, even if the LTV is great. Why? If the house forecloses, the person/bank holding the first mortgage gets paid first. If you are holding the second mortgage, you may end up with nothing at all!

To find out more, buy and read Private Mortgage Investing by Teri B. Clark.

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