- Your loan-to-value (LTV) ratio shows how much you owe on your mortgage compared to your home's value.
- Mortgage lenders use LTVs to determine eligibility for loan programs.
- LTV can also influence what interest rate you get on your mortgage and whether you need mortgage insurance.
Lenders consider many factors when you apply to get a mortgage. There's your credit and debts, for example, as well as the price of the home you're buying. Your LTV — or loan-to-value ratio — also plays a major role.
What does LTV mean?
When your mortgage lender refers to LTV, they're talking about your loan-to-value ratio. This ratio shows how much you owe on your mortgage compared to your home's value.
The higher your LTV, the harder it can be to get approved for a mortgage. Your LTV also determines whether you'll need to pay for private mortgage insurance (PMI) and can influence your interest rate.
How to calculate loan-to-value ratio
LTV ratio is a number that represents the relationship between the amount you owe on your mortgage (the loan) and how much your home is worth (the value). It's expressed as a percentage. Knowing your LTV ratio helps you understand how much of your home you own in financial terms.
Formula for calculating LTV
To figure out what your LTV ratio is, divide the amount you owe on your mortgage by the value of your home, then multiply by 100.
If you're just now buying a home and don't yet have a mortgage balance, take the price of the home and subtract your down payment. Then, divide that number by the price of the home and multiply by 100.
Here's the exact formula for calculating the loan-to-value ratio for home loans:
- Mortgage balance / home value = Y
- Y x 100 = LTV
Example calculations
Here's how calculating LTV looks in action: Say you're buying a $400,000 home and intend to put $50,000 down. That means you'll need a mortgage balance of $350,000.
You'll take that $350,000, divide it by the home's value — $400,000 — and get 0.875. Multiply that by 100, and you get an LTV ratio of 87.5%.
The role of LTV in mortgage lending
LTV plays three parts in lending: There's the role of LTV in loan approval processes, its role in interest rates, and its role in mortgage insurance. Here's how you can expect LTV to impact you as a borrower.
Impact on interest rates
Your LTV directly correlates to how risky you are as a borrower. If you have a high LTV, it means you have very little skin in the game. You own only a smart portion of your home, and your lender is footing the bill for most of it. This puts the lender at high risk — with a lot of money on the line — should you fail to make payments.
For this reason, lenders typically charge higher mortgage rates for high LTVs. This gives them some added protection should you default on the loan. Conversely, lenders typically reward a lower LTV ratio with a lower mortgage rate.
Influence on loan approval and mortgage insurance
You'll need to have a certain LTV to qualify for a mortgage loan. This threshold varies by loan program but it can range from 80% to 100%. Lenders can impose stricter LTV requirements if they wish to.
You should also consider the impact of LTV on mortgage insurance requirements, as you'll typically owe PMI if your LTV is more than 80%. According to Freddie Mac, PMI typically costs between $30 to $70 a month for every $100,000 borrowed.
Improving your LTV
There are two basic strategies to improve your LTV ratio: Make a larger down payment or increase your home value.
Making a larger down payment
If you aren't in a huge rush to buy, consider holding off until you can save up for a larger down payment.
If you can get your down payment to at least 20% of your home's price tag — putting you at an LTV of 80% — you'll be in a much better place to qualify for a loan and snag a low interest rate.
Adding value to the property
Increasing your home value decreases your LTV. If you're thinking about refinancing, improving your home's value can help you earn better terms. You could do this by making significant improvements, such as remodeling your kitchen or adding a new bedroom, or you can do it by making much-needed repairs, like fixing the roof or installing new plumbing.
Sometimes, making your home more energy efficient can help improve its value, too.
LTV and refinancing
If you already own a home and are hoping to refinance your mortgage, your LTV will come back into play once again, affecting what loans you can apply for and what interest rate you'll get when you do.
How LTV affects refinancing options
Most mortgage loan programs have maximum LTV rules, so calculate your current LTV to determine what you're working with. If you're doing a regular rate-and-term refinance, you may only need an LTV of 97% or lower. But for a cash-out refinance, you may not be able to exceed 80%.
LTV requirements for refinancing are more lenient when you refinance into a government-backed mortgage, including FHA, VA, and USDA loans. We'll go more into these requirements later on.
Benefits of lower LTV for refinancing
A lower LTV is always going to make refinancing easier. For one, it will open up more potential loan programs — and ensure you qualify for them.
It also makes you a lower-risk borrower, which lenders usually reward with lower interest rates. This can mean a lower monthly payment and significant interest savings in the long term.
Finally, a low LTV will help you avoid owing mortgage insurance. Depending on the loan program, this might be due at closing, as part of your monthly payment, or both.
LTVs for different loan types
LTV requirements vary by loan program, so you'll need to do some research before deciding which type of loan to refinance into or buy a home with. See below for the LTV requirements for popular mortgage loan programs.
Differences in LTV requirements for various loans
For conventional loans, you'll need a 97% LTV or lower, though you may want to aim for 80% if you'd like to avoid PMI. For FHA loans, the max is 96.5%. For VA loans and USDA loans, you can have LTVs up to 100%.
Just remember that lenders look at more than just your LTV ratio when deciding whether to approve your application. For example, you may technically be able to get a VA mortgage with a high LTV ratio, but a lender could still reject your application if you have a poor credit score.
HELOCs and home equity loans
If you're looking to borrow from your home equity using a home equity line of credit (HELOC) or home equity loan, then your LTV is once again important. These lenders will look at your combined loan-to-value ratio, or CLTV, which includes both your primary mortgage and any additional loans you have on the property.
The exact requirements vary by lender, but many require you to have a maximum CLTV between 80% and 90%. Keep in mind: That CLTV should include your existing mortgage balance and the balance you plan to take out on your home equity loan or HELOC.
So, if your home is worth $400,000, you have a mortgage balance of $250,000, and you're taking out a HELOC for $50,000, you'd have an LTV of 75% (300,000 / 400,000 = 0.75.)
Loan-to-value ratio FAQs
What is a good loan-to-value ratio for a refinance?
The lower your loan-to-value ratio, the better off you'll be when refinancing. For conventional loans, a rate-and-term refinance can't have an LTV above 97%, while a cash-out refinance can't exceed 80%.
How is LTV calculated?
LTV is calculated by dividing the loan amount by the value of the home and then multiplying that 100 to get a percentage.
Why is LTV important for mortgage loans?
Lenders use your LTV to determine loan eligibility, interest rates, and whether mortgage insurance will be required. Lower LTV ratios are typically seen as less risky and can lead to better loan terms.
How can I improve my LTV ratio?
You can improve your LTV by making a larger down payment, paying down your mortgage loan balance, or increasing your home's value through improvements or renovations.
Does LTV affect refinancing options?
Yes, a lower LTV ratio can significantly improve your chances of qualifying for a refinance. It can also help you get a lower interest rate and avoid private mortgage insurance.
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