High Ratio Mortgage
Definition and meaning of High Ratio Mortgage in real estate.
A high-ratio mortgage is a home loan where the borrowed amount represents a large percentage of the property's purchase price or appraised value, typically exceeding 80 percent of the home's value. This means the borrower's down payment is less than 20 percent of the purchase price.
In more detail
Lenders view these loans as higher risk because the borrower has less personal capital invested in the property. To mitigate this risk, lenders in the United States generally require borrowers to purchase private mortgage insurance, which protects the lender if the borrower defaults on the loan.
Buyers who choose this option can purchase a home sooner without saving a massive down payment, but they will face higher monthly payments due to the cost of the insurance. The loan-to-value ratio is calculated by dividing the loan amount by the lesser of the sales price or appraised value.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Loan-to-value ratio | Typically over 80% |
| Required insurance | Private Mortgage Insurance (PMI) |
| Benefit to buyer | Lower initial cash requirement |
A buyer purchases a home with a small down payment of less than ten percent, resulting in a high-ratio mortgage that requires monthly private mortgage insurance payments.
Frequently asked questions
How can I avoid paying mortgage insurance on a high-ratio loan?
Borrowers can typically request to cancel private mortgage insurance once their principal balance drops to 80 percent of the home's original value, or wait for automatic termination at 78 percent.
Are high-ratio mortgages more expensive?
Yes, they generally have higher monthly costs because of the mandatory mortgage insurance premiums and may also carry slightly higher interest rates.