LTV: Loan-To-Value Explained

A loan-to-value (LTV) ratio is the number that shows the difference between what you owe on your mortgage and the value of your home.

Knowing your LTV can better prepare you for a home purchase or refinance. When you borrow money to buy a home or refinance your mortgage, lenders will compare the amount you’re borrowing against the value of the property. That percentage helps determine which type of loan you can get and what your interest rate will be.

How to Calculate LTV?

LTV is calculated by dividing the loan amount by the appraised value of the property (LTV = Loan amount/Property value). Here’s an example that illustrates how LTV is calculated:

  • Appraised property value: $600,000, Loan amount: $450,000

    • $450,000/$600,000 = 0.75 --> LTV: 75%

How Does A Down Payment Impact Your LTV?

When buying a home, you can lower your LTV by increasing your down payment. Here’s an example of how a larger down payment can decrease your LTV.

  • Appraised property value: $600,000, Down payment: $50,000, Loan amount: $400,000

    • $400,000/$600,000 = 0.68 --> LTV: 68%

What's A Good LTV?

An LTV of 80% or lower is an ideal target – not only does this mean you you’ll be eligible for preferable loan options with better rates, but you can avoid paying mortgage insurance, saving you hundreds on your mortgage payments.

An LTV higher than 80% generally means you’ll have to pay for mortgage insurance. Mortgage insurance allows the lender to lend you the money to buy or refinance your house while protecting the lender in case you default on the loan. When you’re buying a home or refinancing, there are ways your LTV can improve.

How To Improve Your LTV?

When buying a home, making a larger down payment will lead to a lower LTV. Lenders and mortgage investors take your down payment as one indicator of the risk involved in your loan. From a lender’s perspective, when home buyers invest more of their own funds upfront, lenders will see them as serious and invested borrowers.

If you’re unable to make a larger down payment, (let’s say you have a fixed amount of money to spend) the other option is to focus on less expensive homes. This will lower your LTV and might help you get a more preferable loan option.

How To Improve Your LTV When Refinancing?

When you own a home, there are a few ways your LTV can improve:

 

  • Making your regular mortgage payments. This will lower your principal balance (the amount you borrowed) and build your equity.

 

  • Completing home improvement projects. For example, renovating your kitchen can add value to your home, lowering your LTV.

 

  • The housing market shifts. Based on your home’s location and how many people are interested in buying a home, your property value could increase, leading to a lower LTV. With a lower LTV, you may qualify for a home loan that you weren’t eligible for when you purchased your home. It could be time to refinance your mortgage to improve your interest rate, take cash out or eliminate PMI.