Glossary: Leverage – Loan To Value Ratio
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- Leverage — the use of borrowed funds to complete an investment transaction. The higher the proportion of borrowed funds used to make the investment, the higher the leverage and the lower the proportion of equity funds. Borrowed funds are used to increase the return for those supplying the equity funds.
- Lien – a legal claim against a piece of property that can prevent it from being sold unless the lien is satisfied (paid off). Liens can be filed by unpaid contractors or other debtors in a legal process so that they will be paid when a property is sold.
- Loan Flipping – repeatedly refinancing a mortgage without benefit to the borrower. Firms that do so profit from high origination fees and closing costs, points and other charges that strip away home equity. Loan flipping is considered predatory lending.
- Loan To Value Ratio (LTV) – the ratio of the mortgage loan principal (amount borrowed) to the property’s appraised value (selling price). On a $100,000 home, with a mortgage loan principal of $80,000, the loan to value ratio is eighty percent. The higher the LTV, the higher the interest rate on the mortgage because of the increased risk faced by the lender. A high down payment reduces the LTV and therefore lowers the risk, which results in a lower interest rate over the term of the loan.
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