FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities
A home is bought for $500,000 with a $400,000 mortgage, so the initial loan-to-value ratio is 80%. After two years the outstanding balance is $390,000 and the home is revalued at $450,000. A lender is considering a second lien of $40,000 on the property. What is the combined loan-to-value ratio including the second lien at the revalued price?
The combined loan-to-value ratio is about 95.6%. Total secured debt is $390,000 first lien plus $40,000 second lien, equal to $430,000, divided by the current property value of $450,000, not the original purchase price.
- A95.6%Correct
- B86.7%
- C78.0%
- D80.0%
Explanation
Total debt = 390,000 + 40,000 = 430,000. Combined LTV = 430,000 / 450,000 = 95.6%. Using the original price gives 86%, and using only the first lien at the new value gives 86.7%.
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