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Note Safety—Loan-To-Value Ratio

A low loan-to-value ratio makes your note safer and increases its resale value. The loan-to-value ratio for your note is the sum of the current loan balance for your loan and all senior loans divided by the current market value of the property securing the note.

Loan-to-value ratio for a second loan having a current balance of $30,000, an underlying first deed of trust with a loan balance of $100,000 and a current property value of $200,000 is 65% (130,000÷ 200,000).

The priority of your note and deed of trust on the property (first position, second position, etc.) is critical to the note’s value and should be verified by going to the county recorder’s office and researching the title if you have any doubt about its priority.

This can be done by finding the document numbers of the liens filed against the property in the grantor/grantee index at the recorder’s office and then reviewing the time stamp on each document to see which one was filed first, second, etc. You must know the priority of your note and the loan balances on any senior liens to be able to accurately calculate loan-to-value ratio.

If the loan-to-value ratio for your note is too high, there may not be enough equity in the property to pay off your note plus back payments, late charges and foreclosures costs in the event of a default and resulting foreclosure.

The loan-to-value ratio of your note should improve over time because the loan balances are being reduced. If the property appreciates, this also improves loan-to-value ratio (makes it lower).

The same low loan-to-value ratio that improves the safety of your note also makes it more valuable because the risk of ownership is reduced.

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